This is Why Goldman Thinks Oil is Headed to $20 a Barrel

Friday, December 18, 2015

The following, by Huileng Tan, was originally published on here:

Goldman Sachs sees further weakness for oil due to the worsening of already weak fundamentals after OPEC held back from cutting production at its recent meeting.

The investment bank is standing by its prediction of $20 a barrel bottom — the breakeven cash cost for highly levered high-cost US shale producers. If oil prices fall below that level, companies will have to make output cuts in order to avert losses.

Even though global oil stock will remain below storage capacity, Goldman said the rebalancing is "far from achieved" as U.S. rig count and exploration and production guidance are "too high" to achieve the required supply decline.

OPEC is also likely to pump aggressively toward the high-end of Goldman's 32-million-barrel a day forecast as Iran resumes productions after U.S. sanctions are lifted over the next few months.

Oil storage also runs the risk of hitting constraints by next spring.

Oil prices have fallen over 50 percent in the last 18 months due to burgeoning energy supply and slowing demand.

"The post-OPEC oil price decline accelerated as the discord between members became more apparent and the lack of a supply response more certain. The meeting confirmed our view that it is not in OPEC's interest to balance the market in the face of still growing higher-cost production," Goldman Sachs analysts wrote in a report Thursday.

OPEC's resolve was strengthened after U.S. production picked up once prices neared $60 a barrel this summer, they added.

The group of 13 oil-producing countries has kept its production ceiling around 30 million barrels a day for years, with kingpin Saudi Arabia standing firm against an output cut in order to maintain market share and drive higher cost producers out.

"Despite the fiscal challenges that low oil prices create now, the alternative of cutting production reduces long-term revenues instead," said the Goldman Sachs analysts.

Oil prices are now near seven-year-lows with U.S. WTI crude prices are around $35 a barrel — below Goldman's three-month $38 a barrel forecast — while Brent crude is now around $37 a barrel.

OPEC said in its latest monthly report that the supply of oil from countries outside of the cartel will contract next year.

Some market watchers who see OPEC's strategy working eye a rebound in prices by late 2016.

Analysts at Societe Generale said in a note Friday that they expect Brent oil to rebound to $60 a barrel in the fourth quarter of next year due to a drop in stockbuild growth in the second half of the year.

"Saudi Arabia's policy change in November 2014, when it decided to stop defending prices and pursue a market-share strategy by maximizing production of its low-cost crude is beginning to bear fruit: US shale oil production has started to drop," the SocGen analysts wrote.

Read the original article here.


Will Gas Prices Go Back Up?

Tuesday, December 1, 2015

The following is excerpted from an article in the Wall Street Journal entitled, OPEC Is Ready to Rumble Over Saudi Output, published Nov. 29, 2015:

Pressure is building on Saudi Arabia to rein in its oil output after a year of pumping full tilt, setting up the most contentious OPEC meeting in years.

A year ago, the Organization of the Petroleum Exporting Countries surprised markets with a Saudi-led strategy of keeping output high to win market share and squeeze presumably weaker rivals in the U.S. and elsewhere out of the market.

But with those rivals proving resilient and prices falling to new lows, members including Iran have decided the effort was a failure and are preparing to press Saudi Arabia directly to pull back on production at the group’s meeting this week.

Discontent is even building inside Saudi Arabia over the strategy. Still, the oil-rich kingdom isn’t likely to relent — in part because it is wary of rising Iranian output as sanctions are lifted. The result is likely to be a continued standoff that keeps the market glutted and prices weak.

Tensions within OPEC have mounted as Saudi Arabia contributes to a global glut of oil with record production levels. Crude prices, weighed down by the oversupply, have averaged $56 a barrel in 2015, down from $97 in 2014, gutting the finances of OPEC members such as Venezuela, Algeria and Angola and threatening their ability to keep up production.

This week, Iran is expected to demand that Saudi Arabia cut back from production levels of more than 10 million barrels a day.

Venezuela, Nigeria and Angola are also expected to force discussions over production cuts.

Saudi Arabia, which long acted as swing producer supporting the market when necessary with output cuts, has signaled it won’t alter course. Its new approach is a long-term strategy designed to force out supplies from non-OPEC producers thought to need higher prices to keep pumping, such as those getting crude from deepwater projects and oil sands.

Privately, Saudi officials acknowledge they too have been distressed by the persistence of low oil prices, which has forced the kingdom to spend down some of its reserves of hard currency. They are considering their options “because there is a growing discontent in the kingdom about the low oil price,” said an oil official from a Persian Gulf country.

But Saudi Arabia is unlikely to consider cutting until June 2016 at the earliest, when Iran’s ability to return to the market and the effect on prices becomes clear, analysts and officials say. Answers to questions about demand, especially surrounding an economic slowdown in China, the world’s biggest consumer of energy, will also be clearer then.

Analysts say the kingdom likely has enough of a financial cushion to weather the low oil prices for now.

Another factor keeping prices low, analysts say, is the price war that has broken out among OPEC members. Saudi Arabia and Kuwait are offering to pay for the shipping and even insurance on deliveries for customers in Asia, where the competition has been particularly fierce. The competition has also spread to Europe.

Read the whole article: OPEC Is Ready to Rumble Over Saudi Output.


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