The business world is full of sometimes conflicting theories about what caused the plunge in oil prices during the past seven months, and how low that price will go. But Goldman Sachs seems to have come up with a unified theory.
It began late in the afternoon of Jan. 26 when Gary Cohn, the president of Goldman Sachs Group Inc., told the CNBC television program "Closing Bell" that he expected the average price of oil, now around the $45 range per barrel, to fall further, perhaps as low as $30 per barrel.
"My view is we're probably in the lower, longer view," said Cohn, a former oil trader. "We could definitely get down to $30."
On the same day, Jeff Currie, Goldman's chief commodity analyst, issued a research paper saying the demand for oil is slowing down in emerging economies, including China, meaning that the price of crude will stay low for a long time, and may never return to the prices they fetched 10 years ago. Related: Increasing Demand For Refined Products Will Increase Oil Prices
In fact it was Currie who predicted that the price of oil would exceed $100 as it did a decade ago. Now, though, he points to a more recent element in the equation: the surge in shale oil production by the United States.
"For the first time since the 1940s, the U.S. is no longer the world's largest [oil] importer," Currie wrote. "It has ceded that dubious position to China, which with other emerging markets, is now forced to pay up for the last barrel of oil it needs from the rest of the world. As a result, gone are the days of surging [emerging market] oil demand."
Oil prices eventually may rebound, Currie said, but the current crash in oil prices may be the most "startling and far-reaching market development" since the financial crisis of 2008, and so he doesn't expect the price of crude will return to levels of $100 per barrel or more.
The price of oil has fallen nearly 60 percent since June as the United States took advantage of hydraulic fracturing, or fracking, for extracting shale oil, and has been producing crude faster than it has in 30 years. At the same time, OPEC has refused to cut output to lower prices and, apparently, to make expensive fracking unprofitable. That would force Americans to resume importing the cartel's oil.
This has been a big week for oil price forecasts. Besides the predictions from Cohn and Currie, OPEC's secretary-general, Abdullah al-Badri, said - also on Jan. 26 - that he expects the price of oil finally may have reached bottom of between $45 and $55 per barrel, and soon may rebound, perhaps - but not necessarily - reaching a level of $200 per barrel. Related: OPEC Chief Claims Oil Will Rebound Higher Than In 2008
Al-Badri cautioned, however, that his forecast was predicated on OPEC cutting production, which would lead to excess capacity, and therefore a reduction in investment in new sources of oil. In three or four years, he hypothesized, that would cut deeply into the supply of oil, driving up its price.
And Bob Dudley, BP's CEO, said Jan. 21 at the World Economic Forum in Davos, Switzerland, that he expects the price of oil to stagnate at current levels for as long as three years, causing broad job losses and lower investment in the industry.
But that wouldn't change OPEC's oil-pricing strategy, according to Ali al-Naimi, Saudi Arabia's oil minister and, lately, the unofficial spokesman for the cartel. "Whether it goes down to $20, $40, $50, $60 - it is irrelevant," he said in an interview published Dec. 22 in Middle East Economic Survey (MEES).
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com More
Comments
The stubbornly high price of oil provided the incentive for increased investment in the sector, and easy money's search for high yielding assets lead to a leveraged boom in both developing and developed countries, resulting in the overcapacity we see today.
For GS to declare that we will see a prolonged period of low priced oil can only mean that they forsee a future of demand destruction. A large proportion of the current oversupply will not be sustainable for entities servicing large debts, and when the weaker plays are shaken out only demand destruction could prevent the price from climbing back to where it was.
The world has only slightly decoupled economic growth from growth in oil demand, which means that GS is effectively predicting a prolonged global economic depression.