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Goldman Sachs Expects Another Oil Price Crash

While it may be tempting to argue that the worst is behind us for oil price given the historic collapse in WTI which crashed to negative $40 on Monday as holders of May WTI futures panicked to sell their holdings at any price - even paying the "buyer" for taking possession of the deliverable barrels -  Goldman's chief commodity strategist Jeffrey Currie reminds us that it is important to remember that unlike bonds and stocks, "commodities are spot assets, not anticipatory assets and must clear current supply and demand, which still remain extremely out of balance in all markets."

And since oil supply remains vastly greater than demand, we are merely in the eye of the hurricane at least until the June WTI maturity in one month, with Goldman expecting the market to test global storage capacity in the next 3-4 weeks - unlike WTI which was merely a Cushing event - which will likely create substantial volatility with more spikes to the downside until supply finally equals demand, as with nowhere to store the oil, supply has no other option but to be shut-in down in-line with the expected demand losses. Alternatively, we could see another "Monday massacre" with producers of oil willing to pay buyers to take physical possession right around the time all global capacity is full, unless of course US shale producers drastically cut output in the coming days, not weeks.

That's the bad news: the good news is that slowly the market is rebalancing, and once production is well and truly shuttered, there is a potential for a violent price reversal - but remember, one can't just "price it in" as commodities have to reprice through the spot, not forward channel. As Currie notes, "we have now entered the inflection phase where the rebalancing has started, but this period could take 4-8 weeks to resolve before we can comfortably argue a bottom has been carved out." This timeline assumes that peak demand loss was likely last week with nascent restarts in Europe now underway, but as Goldman concedes substantial uncertainty still remains.

In conclusion, "while acknowledging that a balanced market is in eyesight, more forward-looking assets like equities can look past the next several weeks and begin to price a recovery; however, commodities simply do not have that luxury."

By Zerohedge.com

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Leave a comment
  • Mamdouh Salameh on April 24 2020 said:
    No matter how low oil prices may crash, they are going to rebound equally high even going beyond $100 a barrel in accordance with Newton’s third law of physics which stipulates that for every action, there is an equal and opposite reaction.

    The minute the global lockdown eases, oil will be poised for a major comeback.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Jason Balderrama on April 29 2020 said:
    If G&S expects an oil crash why are they buying almost 70k worth of shares just recently?
    I call BS the wealthy stay wealthy for a reason not to loose money.. I will follow their lead . I don't deal with opinions... and they very depending on the source, and I doubt that prediction came from them or maybe it did.. Perhaps a ploy to scare people to dump what they have...Idk. When someone at the top of the ladder knows something lots of people don't know, and they are buying more oil stock, and this is just my opinion.. Powerful companies like G&S know what they are doing...I am not worried about that prediction..
  • John Di Laccii on April 29 2020 said:
    @ Mamdouh,

    You are such a wise person.

    John

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