Goldman Comments On Oil, Sees It Going Back To Recent Highs On "Critically Tight Supply-Demand Fundamentals"

Tyler Durden's picture

Goldman's David Greely, who for a long time was predicting and hoping for a crash in oil, only to see a margin-hike driven one in silver leading to a massive collapse in the commodity complex, is out commenting once again on his outlook on oil. Not surprisingly, the Goldman analyst's chief fear now is that a contracting economy (which Goldman's economists have largely failed to noticed so far) will lead to further commodity weakness. Yet, in typical Goldman fashion, the commodity pump machine has once again disclosed that in the long-term there is only one way for black gold to go: up. From the just released report: "We continue to see fundamentals tightening over the course of this year, likely pushing prices back to recent highs by next year. It is nevertheless important to reiterate that while we saw recent prices as having risen above the levels consistent with underlying near-term supply-demand fundamentals, we continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan  oil supplies remain off the market. Consequently, it is important to emphasize that even as oil prices are pulling back from their recent highs,  we expect them to return to or surpass the recent highs by next year."

Note summary:

Brent crude oil prices plummeted yesterday (May 5), falling $10.39/bbl to $110.80/bbl as of the NYMEX close, extending the declines of the past three days (Exhibit 1). In our view, the sharp decline resulted from prices pushing ahead of fundamentals in recent weeks, leaving them vulnerable to a substantial correction (see GS Energy Weekly: Prices return to spring 2008 levels, but fundamentals not there yet, April 12, 2011). We believe that the catalysts for the sell-off yesterday were a string of disappointing economic data releases and the May 4 DOE statistics:

  • ISM non-manufacturing index dropped sharply to 52.8 from the prior month’s 57.3, one of the largest drops in its history. Particularly troubling was the sharp decline in the new orders index, which fell 11.4 points – the biggest monthly drop in the 14 years of the survey – to 52.7.
  • German manufacturing orders fell substantially in March, falling 4.0 percent from the prior month, against the consensus estimate of a 0.4 percent rise. In addition, the ECB left interest rates unchanged and adopted rhetoric that shows less concern about inflation.
  • US initial jobless claims jumped to 474 thousand last week from 431 thousand the prior week and a consensus of 410 thousand. While several distortions likely contributed to the increase, the result was still poor. Due to the timing of the survey, this report is more likely to have implications for the May employment report than for today’s (May 6) Non-farm payroll report.
  • The Weekly Petroleum Status Report from the US DOE reported that US total petroleum inventories are continuing to make the turn into seasonal builds. Over the past two weeks US total petroleum inventories have built 10.4 million barrels. While US oil demand remains relatively flat, allowing total petroleum inventories to build, extremely low US refinery runs have concentrated the recent builds in crude oil and “other product” inventories, while motor gasoline and distillate inventories continue to draw.

Yesterday’s (May 5) sell-off has likely removed a large portion of the risk premium that we believe has been embedded in oil prices, which suggests further downside may be limited from here. However, we remain wary of potential further downside should economic data releases in coming days continue to disappoint, with the focus now turning to today’s (May 6) Non-farm payroll report in the United States.

It is nevertheless important to reiterate that while we saw recent prices as having risen above the levels consistent with underlying near-term supply-demand fundamentals, we continue to believe that supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan supplies remain off the market. Consequently, it is important to emphasize that even as oil prices are pulling back from their recent highswe expect them to return to or surpass the recent highs by next year.

Translation: we were right, for all the wrong reasons, and now it's time to load up the truck, as we have been doing for a while.

GS Oil 5.6

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What does it all mean's picture

I am beyond confusing at this point.   Better not trade...

Silver dropped another 6%, Crude went to 94 handle...

Maybe somebody doesn't want Glenncore to make a billion dollars?

TheGreatPonzi's picture

I admit trading is nearly impossible since April.

Inflation, deflation... impossible to tell right now. If paper money never had been invented, it would be far easier to play collapses. 

citrine's picture

And yet banks continue to report zero of total trading loss days. Those guys seem to be exceptionally brilliant!

rocker's picture

It's so easy to front run yourself. Since they get free money, they could at least be honest.  NOT.

oogs66's picture

So a week ago they convinced clients into selling and didn't get an immediate bounce so now have to start the process of talking up their long position?

Sofa King's picture

His manegers voice mail message: Quick...we need to put a floor under this!!!  Make up some horse-shit about tight supplies.

TooBearish's picture

hilarious - CNBS said GS sees more downward pressure in earl - ha!

Dejean Splicer's picture

The 2 headed Grand Lizard simultaneously speaks from both mouths. A peculiar event that signifies a coming singularity.

boooyaaaah's picture

They still believe in peak oil  ----  because they will get rich on cap and trade

if they convince enough people that that lie is truth

Have they ever hear of Marcellus Shale Gas?

Not to mention the other deeper gas bearing shale more towards Ohio

Tyler --- GS is a theiving naked shorting market manipulating entity

So because they think this commodity oil gas will go up and you think silver will go up are you now bed fellows?


JOHNICON's picture

The whole peak oil theory just sounds logical and self-evident to me.  By the way, the Marcellus Shale Gas natural gas, not oil.  The two are not interchangable, so I'm not sure why you bring that up to explain away Peak Oil.  Why are you so vociferously opposed to the idea of peak oil?

Dejean Splicer's picture

Maybe because it's a bullshit argument to cover wholesale manipulation? Just maybe. Nothing can inflate economic activity quicker than the price of oil.

No one commodity is more lethal in geopolitical economic warfare than oil. Just ask the Russians how and why it all came crumbling down. And now ask the Chinese what $100+ is doing to their economy.

Peak bullshit.

Flakmeister's picture

Let’s look at the data:

1) Net Oil exports from producers peaked in 2005. There is simply less oil on the market. This chart is the tell:

3) Breakdown what is called oil into its real components

C+C, NGL, Other liquids

Now, generously give an EROEI of 6 on “other liquids”, in other words from an energy perspective multiply by 0.85, otherwise you double count the oil to produce the liquids.

NGL is 65% of the energy density of crude

Ignore Refinery Gains, that is simply increasing the volume for the same energy content…

And fold in existing fields are declining at 4.5% (CERA, IHS etc..) per annum and that new fields are barely keeping up.

The energy of Liquids production has been basically flat for 5 years. 

4) The US peaked in 1970, onshore oil peaked in 1981, the North Sea peaked in 1999...

Would care to dispute any of the above?

Dejean Splicer's picture

You are such a trusting naive .gov ZHeeple. Believing all of your statistics without venturing out to discover the real truth. Economic hellfire missiles in 55 gallon drums.

Carry on. It makes no difference to me whatsoever.

Flakmeister's picture

So let me guess, you have the "true insight" because you *just* know better. Do please tell what this real truth is....

You may be right in that it makes no difference whatsoever, except  personally I won't go to the grave as an ignorant fool. As Gandhi once said,

"No matter what you do, it will be insignificant, however, it is very important that you do it"


Are you an abiotic wingnut? Or do you think that Earth has an infinite amount of oil? Or was it the Communist Vegen conspiracy that shut in production in Texas in 1970?

Ident 7777 economy's picture

What's a wingnut anyway in this context; do you perhaps mean 'fan' ...

Your 'paradigm' needs revision.


With carbon and hydrogen being some of the MOST abundant elements in the universe, it's rather naive to believe that ALL oil was a surface-based biological process which then was sub-ducted to form into 'oil' pockets ...


To believe so is 'totally naive' ...





Flakmeister's picture

Abiotic oil does not make any contribution to production. All commercial oil that has been discovered has biological markers in it. All commercial oil found has been in sedimentary rock. I will gladly refute Eugene Island claim and the White Tiger field.

Therefore, without denying the existence of Abiotic Oil, it can be shown that it does not matter.

Ident 7777 economy's picture

Abiotic oil ... 

- - -  - - -  - - -  - - -  - - -  - - -  - - -

NEVER mentioned 'abiotic oil' wise guy.


Flakmeister's picture

 You commented on my use of wingnut vis a vis abiotic oil. That is the connection. Don't try to play semantics or similar shit....

Ident 7777 economy's picture


Instructions to other poster as to conduct, what to argue or not ...



Flakmeister's picture

Do you work hard at being an obfuscating idiot or does it come naturally?

Ident 7777 economy's picture

Flummoxed for an answer, backed into a corner with rationale found lacking - resorts to insults; troll behavior or just juvenile behavior?


Flakmeister's picture

Not at all, you are the one dancing around. Bring some real meat to the table, we will discuss things on their merits... 

Flakmeister's picture

 Wanna go? You ran away earlier, chickenshit.

Ident 7777 economy's picture

Would care to dispute any of the above?

- - -  - - -  - - -  - - -  - - -  - - -  - - -  - - -

Where's your #2?

You skipped a cog this morning doc ...





Flakmeister's picture

Hadn't had my coffee we have 1 trillion barrels of goo and maybe 250 billion more barrels of stuff that can be turned into goo...

Where is all the oil that you are talking about? And you do know what peak oil means from a production and not a reserve perspective? Do you?

Ident 7777 economy's picture

Let’s look at the data:

- - - -  - - - -  - - - -  - - - -  - - - -  - - - -

Fallacious argument; presentation of tabular data as evidence to support an asserted thesis does not in any way guarantee direct cause-effect relationship nor indicate the root cause for an observed effect (e.g. declining production report numbers; other avenues may exist for the 'flow' of product) .




Flakmeister's picture

So, what is your counter argument?  Don't have any do you? I'll take a flamethrower to any strawmen you care to construct...

BTW, learn how to edit out the white space in your comments

Ident 7777 economy's picture

Who says I have to propose a counter arg when yours on the face has been found fallacious?

Try again with yours ...

Flakmeister's picture

Where did you refute Net Exports and the flat energy content of what is called oil aka All Liquids? Nice try....


Ident 7777 economy's picture

Like I said:

Fallacious argument; presentation of tabular data as evidence to support an asserted thesis does not in any way guarantee direct cause-effect relationship nor indicate the root cause for an observed effect.

IOW, a 'snow job' intended to intimidate others.


This man does a far better job of destroying the so-called 'Peak Oil' myth far better than I can in a sentence or two, so I hereby include only a part of it in the discussion:


= = = = = = = = = = = = = = = = = 

I. These [Peak Oil] forecasts seem very confident. Are they credible?

Are they (Pk Oilers like Matt Savinar) subscribing to the Psychic Hotline?

Energy forecasts — esp. those warning of Peak Oil — have been notoriously wrong for many decades. Has the future suddenly become clear as glass? Let us parse the third paragraph on this home page.

Matt Savinar - “In practical and considerably oversimplified terms, this means that if 2005 was the year of global Peak Oil, worldwide oil production in the year 2030 will be the same as it was in 1980.”

It was an evil day for humanity when Johann Carl Friedrich Gauss “invented” the bell curve. It applies to many phenomena, but not to ALL phenomena. 

There is a strong basis to believe the global production curve will be asymmetric. Just to mention one, the graph should be of “liquid fuels” not oil, as substitutes for petroleum (e.g., biofuels, coal to liquids) were insignificant on the way up – but might be significant on the way down. Also, 2005 may have been but probably was not the peak year (see section II below).

Matt Savinar - “However, the world’s population in 2030 will be both much larger (approximately twice) and much more industrialized (oil-dependent) than it was in 1980. Consequently, worldwide demand for oil will outpace worldwide production of oil by a significant margin.”

How wonderful that the author understands so much about the technology and economy of 2030. No doubt he is a billionaire, as his technology and biotech bets made in 1986 must have paid off nicely.

Matt Savinar - “As a result, the price will skyrocket, oil dependant economies will crumble, and resource wars will explode.”

Sounds ominous. Can we see his forecasts for 2008 written in 1986? Did he predict the USSR’s collapse, the two Gulf Wars, the Rise of China, and the economic growth of the past five years (perhaps the fastest global growth since the invention of agriculture)?

The actual experts that I read tend to be more modest in their predictions. In fact, I suspect an inverse correlation between expertise and over-confident rhetoric. For example, Robert Hirsch’s writing sound nothing like this site.

II. Time

- self snipped -

III. The magic of prices

 - self snipped - 

IV. Energy efficiency

 - self snipped -







Flakmeister's picture

  Ah you are back.... Matt Savinar is a doomer, we are not discussing that. We are discussing the fundamentals of supply and demand in the oil market.

Discrediting him does not refute my arguments. Sorry.

One of your links discussed the Bakken, the last  figure here

shows the impact of the Bakken on US production. Sort of puts things in perspective, eh?

Maybe you could explain why Net Oil Exports are down 10% since 2005 and that Chindian demand is still rising taking a larger share of these exports.

Maybe you discuss the declining exports from Saudi Arabia?

You are in way over your head here....


Ident 7777 economy's picture

  Ah you are back.... Matt Savinar is a doomer, we are not discussing that.

- -  - -  - -  - -  - -  - -  - -  - -  - -  - -  - -  - -  - -  - -

We are discussing the roots of your paranoia (and by extension perhaps your 'book' given your possible positions), rooted not so much in fact(s) as it is in the willful misinterpretation of data in order match or meet a particular goal: The Peak Oil Myth.


If I may plagiarize the work of another for the purposes of debate, I say -


"You can torture the numbers [EIA, import/export etc.] as long as you want, but they will not confess. False correlation by an 'outsider' bent on some purpose (an agenda) need not regard subtleties e.g. the interpretation of data - but can merely recite ad nauseam 'the numbers' as if recting some 'magical chant' that will make their prophecy come true.

First, a wave of new capacity is coming on-stream in the next few years — a response to the increase in prices over the last five years. It takes a LONG time to re-start the exploration and development machine, after two decades of downsizing.
Brazil’s new and very deep offshore fields will require drilling over a thousand wells. Today there are less than 50 platforms capable of such work — in the entire world. Everything takes time.

Equally important is political peaking. Just because the Saudi’s or Russia can increase production does not mean that they will, that it is in their best interest to do so. Political peaking has different long-term implications than geological peaking, and the peak oil community has ignored this — mindlessly treating all evidence as evidence of geological peaking."





Flakmeister's picture

  What Myth is there? Oil is finite, the world is finite, at some point production must peak?  What part of that do you not understand?

Do you know the difference between Q and dQ/dt? Do you even know what Peak Oil means?  Your bantering suggests that you do not.

What evidence is there that SA can increase production? Do you know anything about the rig counts in SA? Do you know what a water cut is? Did you know that per well, SA production is down almost 50%?


Ident 7777 economy's picture

What evidence is there that SA can increase production?

- - -  - - -  - - -  - - -  - - -  - - -  - - -  - - -

Einstein cannot consider the will to, or not to increase production, never mind whether the actual DEMAND is there (against most likely an associated decline in PRICE - obviously that would NOT be in their self-interest) or considering the not-so-insignificant feat of ACTUALLY changing/increasing production rates (a dQ/dt if there ever there was one!) on the part of various producers ... coupled with his 'torturing the numbers' (simple production numbers, not accounting for changes in end-user efficiency, alternative sources of base-stock materials etc.) is still intent on spreading the gospel of 'peak oil'.

And still he must nitpick, torture numbers and TELL you what those 'numbers' mean (as only an ordained high-priest of the order of Peak Oil alone is allowed to do) ... meanwhile, if I may say after Edward Sisson:

... we know of world-wide in-ground oil deposits in an amount greater than the amount of known in-ground oil deposits that we knew of 20 years ago. What this meant was that not only had we found, during that 20-year period, new oil in an amount equal to all the oil consumed over those 20 years, we had in fact found even more oil than that.

Looking for new oil is an effort that costs money, and it appears that companies only have an incentive to spend that money to the extent called for by their long-term corporate planning goals — so, for example, once a company is aware of in-ground oil deposits sufficient to satisfy its needs for the next, say, 50 years, the company no longer spends money looking for new oil. 

Thus it is incorrect to take the amount of oil known as of a given date and assume that it represents the totality of the oil mankind will be able to obtain. (There was a similar example of this logic error back in the early 1990s when there was a scare that we were running out of places to store trash and waste, because the landfills and dumps were filling up. The apparent problem merely reflected the fact that municipalities typically plan trash storage for, say, 50 or 100 years, and had secured known storage adequate for those periods, and it was a happenstance of urban planning and management trends that lots of these facilities were filling up at about the same time. Municipalities easily solved the problem in the normal course of their renewed long-term planning, and we have not read of landfill scares for some 20 years).

If there really is a shortage of oil in our future, the signal we should be looking for is whether the cost of exploring for new oil is rising vis-a-vis the amount of new oil discovered by those efforts.





Flakmeister's picture

From CERA/IHS, cost of a new marginal barrel in the GOM is $85-95, assuming that you can find a field sufficiently large so that the $500 million cost to drill the hole can be discounted.

Taking account reserve growth, ( a relic of the old SEC rules on proven reserves), we have not found more oil in a given year than we have consumed since ~1980. There is some debate that Tupi may have been the first find since then to break the sequence, it has to do with OOIP and recoverable oil.

You do know that dQ/dt is relatively insensitive to Q? If one found 100 billion barrels tommorow, thereby increasing world reserves by 10% overnight that it would not move the peak by more than a few months?

How long have you been suffering from verbal diarrhea?

Bartanist's picture

The story is designed to sound logical and self evident to the average Joe on the street, just as pricing based on fundamental analysis of companies is designed to sound self evident.

However, there is less profit and power in having an free market than a controlled one and so it is also logical and self evident that if there are people in power, they will do what is best for them to stay in power and accumulate more. If the first assumption that there is a free supply and demand based market is false, then what does it imply to the rest of your thoughts?

PaperBear's picture

Blah, blah, blah from Goldman.

The supply-demand fundamentals have not been working for decades now.

In 1955 USA depositories are said to have held 3BN oz but these days they hold only 33MN oz - a 99% reduction.

Get physical silver while you still can. The Geological Survey says that silver will be the first element to go extinct in 2020.

AUD's picture

As far as I've heard, there's still a war going on in Libya & things are still tense elsewhere in the Middle East, yet crude has one of its largest one day falls ever?

It's almost as if the bond speculators decided that there is even easier 'money' elsewhere. Like in the bonds central banks have been recently telegraphing they are going to buy outright or repo.

Kind of like water flowing down a hill & following the path of least resistance.

Dejean Splicer's picture

Or maybe their OPEC/Arab partners in price fixing crimes are pissed about Bin Laden and opening the spigots and selling their paper contracts to show who the real boss is?

Remember the crude decline started the day after his death. AD? Something to think about.

~D'jean Splicer

IMA5U's picture

That was fast.  Didn't they downgrade commodities recently?

ivars's picture

That is obvious, oil will be back to Brent 125 by July latest. This dip will end in 1-2 weeks. The lowest dip for many years to come. May be forever.

steve from virginia's picture

You go broke fast trying to predict the price of oil.

It's a matter of guesswork, Goldman is no better than an elf (even though Goldman is has a 'financial relationship' with the InterContinental Exchange (ICE) and large options/commodities trading firm J. Aron). They can front- run themselves but forecasting is beyond them.

One thing that is clear is that the real value of crude- relative to the value of output derived from the 'use' of crude -- will continue to relentlessly increase. This is because  -- after a century of 'efficiency' and 'technological advancement' -- the world has found no better use for crude oil but to burn it up for nothing.

The foregoing capital destruction takes place as companies such as Goldman charge a pittance for the privilege. It's now a 'pittance too far' as the easy to reach and burn crude vanishes. The relationship is between what discretionary returns remain to users and the increasing cost to extract increasing amounts of petroleum: the oil price must meet the the ability of users to pay or the crude 'remains' in the ground.

As earning power diminishes relative to the cost of extraction, dramatically less fuel is brought to market. Fuel now comes from 5000 feet under the ocean, from tight formations with rapid and sharp depletion profiles. Soon enough, only the wealthy have the means to find and extract oil while having proportionately the smallest uses for it.

After all, only on Aston Martin, one yacht, one private jet can be 'driven' at a time ...

Oil prices can decline to $20 per barrel and gasoline fifty cents a gallon. But no American will have the money to afford a car, nor will there be any to steal, nobody will have a job that allows the extra fifty cents and no real oil or car 'industries' will exist.

That's the trend: a move toward the expansion of poverty worldwide, the conversion of America to Detroit and de- industrialization. All this due to resource/capital waste.

On top of this is the talk of 10 billion humans and ten- times current world GDP: madness!


No Bid's picture

No comment suggesting that their buy side is long a few too many crude contracts?

NOTW777's picture

tell me when the price at the pump reflects the recent plunge.  average person buys gallons of gas not barrels

buzzsaw99's picture

History shows again and again how nature points up the folly of man...



r101958's picture

As I said elsewhere, I wonder if there will be an upward 'surprise' in the April UE% rate released today?

Bartanist's picture

The globalist plan for oil is supposedly to get it to $200/bbl next year ... so since that is the plan Goldman must come up with a rationalization for why it is moving the price higher at the same time that consumption is actually declining in the US and the Saudis have cut back on production.


Big lies are the best lies afterall.

r101958's picture

Consumption may, I say may, be declining in the U.S. but it is not declining elsewhere.