Oil could drop below US$20 a barrel as the search for a level which brings supply and demand back to balance makes prices even more volatile, Goldman Sachs Group Inc. predicted.
With ability to store oil exhausted in some places, prices may need to drop low enough to halt crude output that may no longer be stockpiled, said Jeff Currie, Goldman’s head of commodities research.
“When you breach storage capacity, prices need to spike below cash costs as you have to seal in production almost immediately,” Currie said in an interview with Bloomberg Television. Volatility will surge and he “wouldn’t be surprised if this market goes into the teens.”
West Texas Intermediate, the U.S. crude benchmark, traded near US$30 a barrel on Tuesday, having slumped to some 12-year low near US$26 on Jan. 20 as rising OPEC output and resilient U.S. shale production intensifies a global glut. Prices will swing between US$20 and US$40 a barrel within the next 6 to 9 months as the re-balancing process plays out, Currie said.
The storage sites probably to run from space are “landlocked,” such as Cushing, Oklahoma, the delivery point for U.S. crude futures, Currie said. Inventories at Cushing reached 64.2 million barrels within the week to Jan. 15, the greatest in data from the Energy Department that extend back to 2004.
The bearish outlook from Goldman chimed with this presented through the International Energy Agency in the monthly market set of Tuesday. The global oil surplus will be bigger than previously estimated in the first half, enhancing the chance of further price losses, as OPEC members Iran and Iraq bolster production while demand growth slows, the Paris-based IEA said.
Different Cycle
While price swings are going to increase, the oil slump doesn’t seem likely to derail the global economy, Currie said.
“The main difference today versus other cycles in the past is that we’ve many risk-sharing arrangements put in place,” Currie said. Flexible exchange rates in Russia to liquid markets for high-yield debt within the U.S. are all designed to result in the financial system safer, he said.
There’s no visible “link between what’s happening in the commodities space and creating system risk,” Currie said.
Bloomberg.com
