Goldman Sachs: Oil prices to remain low for some time

Oil prices should remain lower for a longer period of time to allow market rebalancing, a report by investment bank Goldman Sachs said late on Thursday.

“The search for a new equilibrium resumes,” the report said. “This spring’s rally in prices did prove to be self-defeating.”

The price of the global benchmark Brent crude oil had fallen from $115 per barrel in June 2014 to its lowest point in five and a half years in January 2015, falling below $48 per barrel, a 60 percent decrease and the worst slump in oil prices since 2008.

However, oil prices recovered 42 percent after January, jumping above $60 per barrel the next month, and reaching almost $70 per barrel in May, according to official figures.

At the beginning of July, the Brent price fell once again below $60 per barrel, and continued to decline. On 3rd August it fell below $50 per barrel, thus erasing the five-month gains and returning the market to where it was in January.

Traders are no longer confident of a quick price rebound, the report said, so the rebalancing of supply and demand will likely prove to be difficult.

“This is all in line with our lower-for-longer view. The risks remain substantially skewed to the downside,” the report said.

Forward oil prices, commodities, currencies and energy equities have now all retracted to levels not seen since 2005, erasing a decade of gains, the report pointed out. “This creates a very different economic environment.”

“The industry simply had not seen enough pain to create the real financial stress that would create change,” the report said.

Goldman estimates that the industry has added some 170 million barrels of oil to storage tanks since January, while 50 million barrels remain in floating storage.

“We estimate that current oversupply is two million barrels a day versus 1.8 million barrels per day in the first half of 2015,” it added.

Falling demand

Meanwhile, global demand is not as high as a decade ago, especially with Asian and European economies struggling with slowdown and recession. The economic slowdown in China creates expectations in the market that the biggest energy consumer in the world will reduce its demand for crude oil.

“The largest demand growth ever observed was in 2004, when China and the emerging markets kicked off the previous decade’s commodity boom with demand at 3.15 million barrels a day,” the report said. “Today, that boom has been brought to a halt. These countries are facing large macro imbalances and debt. Not only has emerging market growth slowed, but any benefits from lower prices are mostly behind us now.”

No quick recovery

Goldman forecasts supply and demand will find a balance between now and sometime in 2016, but warned that this does not mean a sharp rebound in prices will occur quickly.

“Global supply is driven in large part by a surge in low-cost production from Saudi Arabia, Iraq and Russia. In addition, low-cost OPEC producers are likely to expand capacity now that they have pushed output to near max utilization,” the report said.

“At the same time, Iran has the potential to add 200,000 to 400,000 of production in 2016 and, with significant investment, far greater low-cost volumes in 2017 and beyond. Iran, like other OPEC countries, needs the revenue through volume,” the report said.

Goldman said that energy markets need to be rebalanced through consolidation and capital restructuring, but explained that this takes time to achieve.

However, the report did not forecast how low the price of Brent crude should fall for market rebalancing to take place, but said it maintains its near-term target for the American benchmark West Texas Intermediate of $45 per barrel.