Goldman Sachs is very bearish on crude oil prices. The bank has cut its 2016 forecast to $45 a barrel from $57—and it’s leaving open the possibility that prices could go much lower than that.
Everything that was true about the oil market a couple of months ago when oil started falling again is true still, as the firm notes:
In fact, the oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016 on further OPEC production growth, resilient non-OPEC supply and slowing demand growth, with risks skewed to even weaker demand given China’s slowdown and its negative EM feedback loop.
Even OPEC isn’t feeling so hot about oil prices these days. What has deepened the pessimism on the part of Goldman’s analysts is the new stalemate between OPEC and US shale producers.
When the oil recovery was alive and well, America’s oil drillers started bringing oil rigs back online, which wiped away some of the doubts that OPEC (read: Saudi Arabia) had about its refusal to relax its members’ own production. To loosen the stalemate now, Goldman says, shale producers simply might need to be broken:
This creates the risk that a slowdown in US production takes place too late or not at all, forcing oil markets to balance elsewhere or as they have historically cleared, through a collapse to production costs once the surplus breaches logistical and storage capacity. Net, while we are increasingly convinced that the market needs to see lower oil prices for longer to achieve a production cut, the source of this production decline and its forcing mechanism is growing more uncertain, raising the possibility that we may ultimately clear at a sharply lower price with cash costs around $20/bbl Brent prices, on our estimates.