Goldman Sachs’ gloomy oil market prognosis knocked oil prices lower in recent trading sessions, although reports from widely-watched consumer and producer watchdogs pointed to some signs of improvement.
After the prognosis came out on Friday, Goldman’s report was credited for knocking nearly 3.5 per cent off already weak North Sea Brent crude oil futures, which declined from about US$48.90 per barrel to $47.20.
Prices have since struggled to recover and Brent was trading at $47.50 late afternoon Arabian Gulf time yesterday, down 60 cents.
After the dust settled there was a question as to whether the investment bank’s 15-page analysis, led by the senior commodities strategist Damien Courvalin, actually did forecast oil would fall to $20 per barrel, as many headlines suggested.
In the hedged language common of such analysis, Goldman's report said: "While not our base case, the potential for oil prices to fall to [cost-of-production] levels, which we estimate near $20/bbl, is becoming greater."
Goldman’s actual forecast was for oil prices to average $45 per barrel next year, which was a bearish enough change from its previous forecast of $57.
As David Cumming, an analyst at Standard Life in Edinburgh, said yesterday when asked about Goldman’s $20 oil price forecast: “Goldman Sachs have form in this area; they were forecasting $200 oil in 2008 and it subsequently collapsed”.
That may have been slightly unfair. Just as with last Friday’s report, the Goldman analyst Arjun Murti’s actual forecast in 2008 was for oil to average $105 per barrel in 2009 and $110 in 2010. He had also noted the possibility that “a major oil price disruption” could push oil prices to $150-$200 per barrel, which got all the attention.
It is the extreme scenarios that generate the headlines, but as Mr Cumming says: “the problem is that forecasting oil prices is very difficult”.
The Morgan Stanley analyst Ruchir Sharma also used colourful language yesterday to forecast “a long winter” for oil and commodity prices in general. Although his prediction that oil would trade between $35 and $70 per barrel “for many years” is quite a fluid forecast.
For oil prices to fall as low as $20 per barrel, Mr Cumming said, the world economy would have to collapse while Opec took no action, a scenario he does not expect.
Garnering less attention on Friday was the International Energy Agency’s monthly outlook, which noted that “oil’s price collapse is closing down high-cost production from Eagle Ford in Texas to Russia and the North Sea, which may result in the loss next year of half a million barrels a day – the biggest decline in 24 years”.
That would mean the strategy that Saudi Arabia and its oil-producing allies have been pursuing is having an effect. It expects demand for oil to increase to a five-year high next year and the “call on Opec” rising to 32 million barrels per day next year, the highest level in seven years and above current levels of production.
Similarly, Opec's monthly oil market report yesterday struck a cautiously optimistic note: "Global oil-demand growth, benefiting also from low oil prices has strengthened since [our] initial forecast, which may continue for the remainder of the year". Opec has revised higher several times already this year its expected demand for the group's oil.
But what all three reports have in common is that they expect the oil glut to take some time to be absorbed and prices to also have a slow, bumpy ride higher.
amcauley@thenational.ae
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