Goldman Sachs: Crude oil “glut” not real yet 10/17/2014

Goldman Sees No Crude Glut as Price Slump Deemed Excessive


By Ben Sharples

     Oct. 17 (Bloomberg) — Oil’s collapse into a bear market is

excessive because there’s no oversupply to justify the selloff,

according to Goldman Sachs Group Inc.

     The bank is “near-term constructive about prices” after

they fell too much, too soon, analysts including Jeffrey Currie,

the head of commodities research in New York, wrote in a report

e-mailed today. While expectations of a glut have driven down

crude, the risk of a near-term shortage may increase as forward

prices of benchmarks including West Texas Intermediate and Dubai

crude discourage stockpiling, it said.

     Oil futures slumped to the lowest in four years in London

amid the highest U.S. output in almost 30 years and weakening

global demand growth. Members of the Organization of Petroleum

Exporting Countries are responding by cutting prices, prompting

speculation that they will compete for market share rather than

reduce production.

     “The ‘supply glut’ is not yet here today, it exists in

expectations,” the Goldman analysts wrote. “Prices have likely

overshot to the downside.”

     The lower prices go, the tighter the balance between supply

and demand will become, Goldman said. With every 10 percent drop

in oil prices, consumption grows by 0.15 percent, the bank

estimated. Brent crude’s slump of almost 30 percent from its

June peak may mean additional demand of almost 500,000 barrels a

day, according to the bank.


                          Shale Barrel


     This demand response means “pricing in the future can be

self-negating,” the analysts wrote. Dubai crude gained this

week as more Asian buyers entered the market, the bank said.

“In the current environment we believe the risks are skewed to

the upside” for prices.

     Futures are paring losses as other banks including BNP

Paribas SA and Bank of America Corp. predict the rout may be

over. West Texas Intermediate, the U.S. benchmark crude, rose as

much as 1 percent to $83.52 a barrel in New York today,

extending yesterday’s rebound from the lowest price since June

2012. Brent for December settlement was little changed after

advancing 2 percent yesterday in London.

     Goldman said its long-term outlook for oil remains bearish

because of a combination of cost deflation and technological

improvement, and the sharp rise in U.S. shale output combined

with improving supplies from countries outside OPEC such as


     Saudi Arabia, OPEC’s biggest producer, should no longer be

seen as the first producer to act to balance the market, the

bank said. U.S. shale oil production can easily be increased or

decreased, making it the most probable “first swing barrel” to

respond to price changes, according the bank.

     If a glut materializes, WTI would need to drop below $80 a

barrel “for an extended period of time” to prompt a slowdown

in U.S. exploration and production, Goldman said.

     “Given the high level of volatility and uncertainty, we

believe commodity markets will calm at least temporarily until

evidence of oversupply is seen in rising inventories,” the

report said.




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