Respite in Dropping Oil Prices to Be Short-Lived: Goldman Sachs

Dropping Oil PricesWhile oil prices appear to have found some support, interrupting the chute that has seen the resource drop to below $36.00 per barrel, the pause may be temporary and just ahead of a new plunge. According to Goldman Sachs, the excess supply of oil may continue until the second half of next year, with startling effects on declining oil prices.

The oversupply noted in the oil market during the fourth quarter is going to last until the second half of 2016 and the price of crude oil could fall as low as $15.00 a barrel before supply and demand can return a breakeven situation, according to a Goldman Sachs report published on December 22. (Source: “Extreme Oil Bears Bet on $25, $20 and even $15 a Barrel in 2016,” Bloomberg, December 22, 2015.)

The investment bank stressed that supply exceeded demand in the last three months of 2015 by 1.5 million barrels a day. This was also due to milder winter temperatures, which reduced fuel consumption for heating.

“We view the oversupply as continuing well into next year,” said Jeffrey Currie, head of commodities research at Goldman Sachs, in a note. He added, “There’s a risk oil prices could fall to $20.00 a barrel to force production shutdowns if mild weather continues to damp demand.” (Source: Ibid.)

OPEC Doing Nothing to Slow Production and Stop Drop in Oil Prices

Goldman Sachs’ bearish predictions are informed by the fact that the Organization of the Petroleum Exporting Countries (OPEC) has decided not to limit its production in order to confront the increase of oil exports from Iran in the wake of the nuclear agreement and the resilience of countries like Russia that despite the crisis, continue to pump at full speed.

Consequently, speculators at the New York Mercantile Exchange and the U.S. Depository Trust & Clearing Corporation have purchased put options (the ones reflecting a bearish sentiment), counting on oil dropping to $15.00. Bloomberg noted that $25.00-per-barrel oil options (due June 2016) almost doubled in volume last week.

Meanwhile, on December 23, OPEC warned that the price of oil would remain below $100.00 per barrel for a long period before it will start to rise again in conjunction with a production slowdown.

“Overall it’s still very bearish,” said Gareth Lewis-Davies, a London-based energy strategist at BNP Paribas SA. (Source: Ibid.)

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