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Goldman Sachs: Inventory Drawdowns Will Not Continue

Goldman Sachs has reported that…

Goldman Sachs Predicting $45 Oil By October

Goldman Sachs Predicting $45 Oil By October

Could oil prices be in for yet another decline?

Oil prices have rebounded with surprising speed in recent weeks, with WTI prices bouncing by more than a third from March lows.

There are good reasons for this. Rig counts are down by nearly 1,000 (or nearly 60 percent) since hitting a high in October 2014. Spending on some of the world’s largest projects has been cut by a combined $129 billion, a figure that could balloon to $200 billion by 2016. The spending and drilling contraction is finally leading to some small production declines. Related: The Best Way To Find Major Gold Deposits

The downturn in activity sparked optimistic sentiment among oil traders that the markets have adjusted, and could be on their way back up.


Not so fast, says Goldman Sachs. The investment bank argues in a new report that not only is the oil rally a bit premature, but that the rally itself will be “self-defeating.” The rally could bring drillers back, but that would merely contribute to a reversal in price gains. More drilling and more production worsen the glut that has not yet been resolved, and prices could be in for a double dip (or triple dip if you count the price declines from February to March 2015).

The Goldman Sachs report says that the problem is not just from a surplus of crude, but also a surplus of capital. Access to cheap finance has allowed production companies to stay in the game and continue to drill new wells. Even companies that have seen their cash flows dry up or have run into liquidity problems have still been able to find investors willing to pony up fresh capital. Related: Big Oil May Be Caught Off-Guard By Wave Of Retirement

For example, in January and February, the world’s largest oil companies issued $31 billion of new debt, the highest quarterly total on record. Part of the reason for new debt is the need to raise capital – in other words, it is evidence of distress. But new debt was only made possible by the ultra-low interest rate environment. The Federal Reserve has kept interest rates low for many years, hoping to stimulate the economy. But that also has investors struggling to find yield, inducing more risk taking. With safer assets not offering the returns that investors are looking for, large levels of investment and lending are being funneled into oil companies, including some that are in precarious financial positions.

With a financial lifeline in hand, many companies that would have otherwise cut back more drastically are instead kept alive. Some may even begin drilling again. But the recent rise in oil prices is predicated on the fact that a real, authentic balancing is underway. In short, the only way prices stay in the $60 per barrel range, or even rise above that level, is if global oil production is materially reduced. That hasn’t yet happened in a significant way, and if output rebounds because of higher prices, the glut will not be resolved. Related: Here Is Why Predictions For Lower Oil Prices Are Wrong

Goldman Sachs thinks the pieces are in place for another decline in oil prices, perhaps as low as $45 per barrel by October. “We find that the global market imbalances are in fact not solved and believe that the rally will prove self-defeating as it undermines the nascent rebalancing,” Goldman analysts wrote in an investor’s note.

If another round of price declines set in, the oil industry will be forced to make fresh cuts to their drilling fleets, spending programs, and workforces. These swings in prices, and the fortunes of oil companies, will continue until a much more lasting reduction in supplies is realized. In short, as we discussed in a previous article, a much more robust shake out probably needs to take place, w

ith weaker drillers forced out and more production taken offline. That could still be several months away.

By James Stafford of Oilprice.com

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Leave a comment
  • RobG on May 20 2015 said:
    I agree get ready for a long haul with a low price.
  • Silber SHARK on May 20 2015 said:
    Hahaha !!! Don't Believe Goldman S**ks ! WTI is going UP ! My Target $73
  • Karl Yong on May 20 2015 said:
    Analysts has been downgrading oil companies and paint a groom picture from oil with oversupply. Somehow remind me the CDOs era again. Yet over the first half of this year since oil drop to USD 40plus, many had came come out with their report only after the drop, not before, including GS. Oil price since climbed to the level of USD60plus. It is not surprising that GS and certain hedge funds are shorting oil heavily. At least they are consistence in their direction, unlike what they did with CDOs. It's difficult to trust a report from source that screwed their own clients, while making billions taking position against them. While this report was made, short selling percentage against oil companies was dropping. Someone running out of bullets, hence the reports? If there so much oil available, yet major deals like those between China and Russia are signed. Germany are talking to Iran about oil before any agreement is agreed with US and the rest to remove the embargo. Why not wait if there are over-supplied of oil source or oil? It just seem that the group that had been yelling oil drop, their biggest concern is oil price and oil companies keep raising.

    The only thing I will advise investors, with regards to any investment, stay with the fundamental and base your investment judgement on facts and actual numbers, at least it is a clear decision, may or may not be right, as no one can tell the future.
  • irven liu on May 20 2015 said:
    Do not believe this GS=BS.
  • valwayne on May 20 2015 said:
    The current rally in prices seems based more on everybody's desire to see prices go up really bad than any underlying fundamentals. What is interesting is that there seems to be a lot of oil out there that can come online pretty quickly as prices firm up. So baring and emergency we shouldn't see $100 plus a barrel prices for a long time.
  • Polar on May 20 2015 said:
    Are these the same geniuses at GS that predicted on 1/15/2014 that WTI would be at $90 in 12 months and Brent at $100. Ummm, not even close.
  • Mike Dedmonton on May 20 2015 said:
    The fundamentals are even worse than when oil was $ 45 earlier this year. Every country appears to be putting out as much oil as possible. This could change at some point, but right now, continued over supply will push prices down. Its amazing that with capex slashed, OECD producers have figured how to pump out more for less.
  • Masshole on May 20 2015 said:
    if Oil isn't going over $65 w/ a war on the Arabian pennisula then you can bet it's going to $40 when things calm down. If today's geopolitical situation existed 10 years ago (before fracking) oil would be @ $170
  • Lar on May 21 2015 said:
    Now, I'm confident that the folks down at GS aren't stupid. But, timing of its publication on oil's direction "analysis" couldn't have been more suspect. Tue, 19 May 2015 22:48 - right to the minute.

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