The investment banking giant reported on the oil price forecast on Friday, concluding that before the dust settles, the oil price might go as low as $20.00 per barrel. (Source: CBC, last accessed September 11, 2015.) It joins Citigroup Inc. (NYSE:C), which recently warned of crude slipping below $30.00 per barrel. (Source: Bloomberg, last accessed September 11, 2015.)
The reason for this negative forecast is that the global oversupply of crude oil is showing itself to be worse than anyone expected. Emerging data shows that we won’t be facing any relief from currently rising oil stockpiles or surging production. (Source: IEA, last accessed September 11, 2015.)
Indeed, analysts are now expecting this production surplus to continue throughout this year and into 2016. (Source: Globe and Mail, last accessed September 11, 2015.)
Goldman Sachs is now banking on the price of West Texas intermediate (WTI) to average about $45.00 per barrel through 2016, an astounding downgrade in its original forecast of $57.00 per barrel. (Source: Reuters, last accessed September 11, 2015.)
While this is the average projected, the chance of crude oil declining to just $20.00 has not been ruled out, according to the bank.
This negative oil price forecast is due to several interrelated issues.
OPEC is the primary culprit, continuing its record-high production levels in an effort to starve out non-OPEC market competitors. As prices have fallen, Saudi Arabia has followed a strategy of ramping up oil extraction in an effort to partially offset revenue losses.
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Russia has also maintained a staggering production level. Although revenue has dropped, its oil companies have fared better than most because taxes are pegged to the oil price and have been adjusted lower.
But cracks are beginning to show, and the IEA expects non-OPEC production, particularly in U.S. shale, to slow down next year by 500,000 barrels to 57.7 million barrels per day. (Source: IEA, last accessed September 11, 2015.)
The effect will not have enough of an effect, as the world is currently oversupplied by approximately two million barrels of crude oil a day.
Demand-side forecasts are also pessimistic, as Goldman Sachs sees worrying clouds gathering over the Chinese stock market crash, threatening global economic collapse. (Source: Bloomberg, last accessed September 11, 2015.)
China, along with India and other large emerging economies, led global oil demand growth since 2009, but slowdowns in these countries have translated into an oil price crash.