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Goldman Warns Over-Supply Means Oil Prices Will Be Much Lower
Via Goldman Sachs' Sven Jari Stehn,
US Daily: Oil Supply versus Demand: A Market Perspective
- We use statistical techniques to explore the drivers of the sharp drop in oil prices since last summer. The idea behind our approach is to use the behavior of oil and equity prices to disentangle demand from supply shifts. Intuitively, we would expect that positive demand shocks should push both equity and oil prices up, while positive supply shocks should push equities up and oil prices down.
- Our model suggests that the vast majority of the decline in oil prices until November 2014 was driven by perceptions of improved supply. The continued sell-off in December and January was driven by perceptions of both improving supply and slowing demand. The latest rebound in oil--which started in late January--appears to be driven by a mix of demand and supply.
- Although our approach is subject to a number of caveats, the main conclusion is consistent with our commodities team's views, who have argued that the decline in oil has been driven by an oversupplied global oil market.
Oil prices have fallen substantially since last summer. Crude West Texas Intermediate (WTI), for example, fell by about 60% between June and January, before starting to rebound somewhat in February. In today’s comment we use statistical techniques to explore the drivers of these changes in the oil price.
The idea behind our approach is to use the behavior of oil and equity prices to disentangle demand from supply shifts. Intuitively, we would expect that positive demand shocks should push both equity and oil prices up, while positive supply shocks should push equities up and oil prices down. We therefore call anything that pushes oil and equities in the same direction a “demand” shock and anything that pushes them in opposite directions a “supply” shock. (This approach is the same as the one used by our colleagues in the Asia economics team, see here.)
The intuition can be seen qualitatively in the chart below which shows the S&P 500 and WTI since January 1, 2005, using daily data. Equities and oil generally both rose between 2005 and 2007, suggesting that strong demand was the primary driver of both. From late 2007, however, equity prices started to soften while crude oil prices continued to rise sharply, pointing to supply "bottlenecks" during this time. Demand was clearly the key driver during the financial crisis, as both equities and oil both plummeted in late summer 2008 and then bounced back in 2009-2010. Oil prices then remained flat between 2011 and the summer of 2014 while equity prices rose significantly. This behavior is consistent with improvements in energy supply--primarily through shale gas--during this time. Oil prices then plummeted in the second half of 2014 but equity prices generally continued to climb, suggesting that supply factors were the key driver.
We then use statistical techniques (a so-called vector autoregression with sign restrictions) to quantify the underlying shocks. More specifically, the methodology provides an estimated decomposition of observed changes in equity prices and oil into underlying shocks by labeling positive co-movements as demand shocks and divergent moves as supply shocks. We focus on daily percent changes in the S&P 500 and WTI oil prices since January 1, 2005, and de-mean both to abstract from their trends during this period. It is important to stress that this approach uses only the time variation of oil and equities—and no other information such as actual economic data—to identify the shocks.
Exhibit 2 shows the estimated demand and supply shocks, cumulated since 2005. The demand pattern looks quite intuitive with strong demand 2005-2008, a collapse in late 2008, strengthening demand from early 2013 and some deceleration more lately. Broadly consistent with our discussion above, the oil supply pattern shows a sharp adverse oil supply shock starting in late 2007, then basically no change between late 2009 and 2011, gradual positive supply shocks 2012-13 and then a sharp increase in supply in the second half of 2014.
We next use our estimated model to decompose the history of oil and equity prices into contributions from demand and supply shocks. Exhibit 3 shows this decomposition since the summer of last year. Our model suggests that the vast majority of the decline in oil until November was driven by perceptions of improved supply. The continued sell-off in December and January, however, was driven by perceptions of both improving supply and slowing demand. The latest rebound in oil--which started in late January--appears to be driven by both demand and supply.
The main conclusion from our analysis is intuitive and consistent with our commodities team's views, who have argued that the decline in oil has been driven by an oversupplied global oil market. As a result, our commodities team expects that the new equilibrium price of oil will likely be much lower than over the past decade. Also, our framework appears reasonably robust to changes in the input variables. For example, we obtained similar results for Brent crude oil prices and when excluding energy stocks from the S&P 500.
* * *
Nonetheless, we need to keep in mind that our analysis is subject to a number of caveats. First, the estimated shocks not only reflect genuine demand and supply news in the oil market—but simply anything that pushes oil prices and equities in the desired direction. For example, the positive supply shock of recent months may represent not only genuine increases in supply in the oil market but also lower global inflation more generally. Second, our analysis can only help us understand market perceptions, as we only use market prices without any additional economic information. The model, therefore, cannot tell us what the “true” underlying drivers are. Finally, our model does not model explicitly other economic developments that affect equity and oil prices, including shifts in inflation and monetary policy.
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Really? Since when have the fundamentals started mattering to the price of the paper-traded asset?
but Gartman said...
This is going to be very bullish for Texas and the Bakken.
~Dick Fister
In summary: Goldman says short so investors then should go long.
This.
Short squeeze incoming in 3...2...1...
Oil, silver, rare earth metals, alt energy, and palladium stocks started to run on Feb 1.
Barclays responds with warning that commodities haven't bottomed yet and Goldman flogs pamphlet on oil.
but not gold, it makes camels vomit
http://www.arabianmoney.net/?p=39998
A vomiting camel formation displayed on an Arabian financial website.
If it were Alaskan, it's 'prolly be a puking polar bear.
Or French, a boiled frog.
Goldman gives free advice because it is the altruistic friend of the working man.
In Oct 2014, Goldman said oil would be 100 a barrel for years to come.
In 2007, Goldman said oil was going to 200 a barrel.
I wouldn't be surprised to see a nasty short squeeze (that Goldman is on the other side, of course,) then see a price drop a few weeks later.
For sure. Dead cat bounce. Watch the short squeeze send oil prices higher, and then just as people are getting confident about the bottom being in, watch it resume its downward plunge.
The oil producers are flooding the markets to capture market share, increase their tax revenues and try to kill one another's public finances.
End result = oversupply short term. Longer term: after the surviving market participants dust themselves off, watch oil bounce to higher heights based on consolidated market power, a lack of investment in a very capital intensive market space etc.
yes sir-i am patient for my first play in 5 years.
thinking fall(maybe sooner), start average'g in...
The final blow to the rig count argument.
http://www.bloomberg.com/news/articles/2015-02-13/this-chart-shows-why-t...
Rig count is a leading, not contemporaneous, indicator of production.
It doesn't matter what sort of "indicator" it happens to be as far as stock prices are concerned. Every time the headlines read rig count down, the algorithms shoot the price of oil up!
The ONLY indicator that seems to matter is whether an algorithm determines whether its good news or bads news. Apparently, a massive oil surplus and storage reaching capacity is not a speculative news item for the algorithms.
Algorithmic trading in energy stocks is a couple levels of abstraction removed from the "rig count argument".
Rig Count Argument = As regional rig counts decline regional production will necessarily also decline.
Recent Financial Media on the "Rig Count Argument" = The US rig count has fallen dramatically for a few months but production is still increasing. Therefore the rig count argument specious and we should expect continued production increases during a period of continued rig count decreases. Or, at minimum: recent rig count declines will have little material impact on the trend towards continued production increases.
The Financial Media perspective is self-evidently false at its boundary conditions. The only questions are where it becomes false as rig count moves towards its lower bound and when that condition will become apparent. BHI recently set forth an imminently reasonable answer to the former (hint: they don't agree with GS) and the latter will become self-evident soon.
My response was valid. Indicator as far as production or indicator as far as stock prices are concerned? Since there is no such thing as FUNDAMENTALS any more as far as stock direction is concerned, everything is governed by indications for SPECULATION/MANIPULATION.
I'm well aware of what rig count and its direction means as it pertains to production. No, there is no "couple levels" of abstraction removed. Oil prices have skyrocketed simply because algorithms drove them there because of "rig count" headlines.
In short Fuck Goldman!
i'll second that with barbed wire...
"Really? Since when have the fundamentals started mattering to the price of the paper-traded asset?"
Now that there is a genuine danger that storage could actually fill up, fundamentals will start reasserting themselves. When that paper starts messing with the actual physical flow of a physical good, reality is going to reassert itself, despite whatever the paper pushers may want. They cannot print storage and they cannot print physical crude. It's an Achilles heel of theirs.
Go tell that to gold.
Gold doesn't trade like a commodity. it's a currency.
"They cannot print storage and they cannot print physical crude". That's not what I've heard. Far more trading of the commodity occurs than actual supply, thanks to leverage and margin. The actual quantity present is irrelevant. An example of that is the naked short.
Fundamentals will NEVER reassert themselves with the NWO or central banks calling the shots with unlimited funny money.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
I love how everyone is so concerned about the price. Where are the people wailing ,"PEAK OIL !" They aren't there, it's all about how much the consumer can be squeezed for and bloated oil State budgets. Fuck'm, I love $1.99 gas and it's what I should have been paying the whole time. I want a refund.
The biggest peak oil fucker "fell asleep" in his hottub. The rest of them are chanting their mantra that shale oil is a fraud. I want oil to go down as low as possible and stay there.
I want oil to go so low that I never see a pair of Trucknutz ever again! Bunch of overpaid motherfucker oil workers.
peak a boo. or peak peak, ha...
Here in canada, we paid about $1.20/liter when oil was $110/barrel, It is now at $52/barrel and we pay $0.92/liter. Who wins? Raw material down 53%, profit at pump down 23%. Hmmm. No price-fixing or tax gouging here.
Bulls really need to watch this video. Danielle Park, in 2012 she said gold would remain the same or go lower. Unpopular call, but 100% right. Never heard her make a bad call.
https://www.youtube.com/watch?v=2eHv9PMRKZQ
...Raw material down 53%, profit at pump down 23%...
I have to laugh, US gas prices are still "quoted" in prices to the nearest frn.009 at the pump.
Who still conducts retail monetary transactions on the mil besides the US gasoline purchaser? I haven't used Blue Chip or even Green Stamps since I quit bowling in the 1980's.
Do retail stock outfits, (Schwaub / E-Trade or the like) even figure to that decimal point anymore? I figure any algo initiated program calculated to zirp / nirp will spit out "does not compute" to the nerds employed by these tbtf folks.
They’re the only ones capable of reaping any benefit to those ridiculously minute figures as frn3,000 interest free millions per day for the last 7 years are going to these brood of vipers.
I'm resigned to the fact I will never need to compute my future wealth / income / estate to that nth degree (unless deflation becomes even greater than the inflation of the early 1980's), so all these bankers without borders can pack it in and move to their settlements in the West Bank.
So, If Jeremiah were alive today, do you suppose he would buy real estate in the US?
jmho.
sages: Certainly there is price gougng but what you are not discounting is the Canadian loonie dropping in price visa vi the US dollars during the last few months.
Don't forget Canada , like many other US tribute countries, have to pay for our own domesctically produced oil in US dollars.
umm
I think they're wailing "global depression oil" now.
But it's too soon to tell.
Phuk it I give up........ Peak Oil .......... Global Warming........ 911..... Everything is fuking awesome .......... Peak {Every thing} in context.... Facist state.... world government....... will somebody please shove it all up thier collective asses......
"Where are the people wailing ,"PEAK OIL !" They aren't there..."
They are sick of trying to explain what Peak Oil is to people like you, that is where they are. I'll do it once more, just to get it through your thick scull. Peak Oil is when the world plateaus on its PRODUCTION of oil. It isn't that oil is gone, it isn't that people's needs are or are not met. It is not about demand. It is when production of oil hits a ceiling.
Peak oil is exactly why we have fracking, oil wars and arctic drilling. They have to do backflips to keep the production up now. Oil is a finite resource. A Texas Jed Clampett type well just can't be drilled anymore in most places. They've drilled them all to kingdome come.
Peak Oil contributes in part to the global economic shitstorm too, helping slow down the economy. This, by the way, was predicted 15 years ago or more. It is called 'bumping' and it is what happens when we 'bump' into peak production.
For christ sakes make at least a mouth breathing attempt to open up your mind and try to understand what you read.
Thank you.
No ceiling yet. Both reserves and production still growing.
Maybe it iw what you take in when you open you mind that is causing you to be confused? Dick in ear is reported to cause brain damage.
Could be (dick in ear.... one never knows) but reserves have nothing to do with production, and reserves are classicly overstated to boot. I shouldn't say, "nothing" but more like little. Also, reserves can't increase. They are finite by definition. California downgraded their reserves by 90% las year. That should point out a little bit about declared reserves.
As far as production growing, I'm talking about useable oil, easily (under $90/bbl) to refine to put in your car eventually oil. The tar sands stuff is low grade, as is much oil at the end of a well's life. Even if you put in everything else (fracked, tar, etc) you'll see a plateau (within a million bbls or so) since 2005. This is even when demand was higher than production (cue need to frack wells). I admit to being really surprised at the output of oil the last several years. It's incredibly impressive, esp. the US's role. The thing is it is (was?) a gold rush.
Every person in the industry, and even the casual observer like a land owner being forced to allow drilling, understands that the entire bakken has already been raped of most of the "easy" to get to shale oil. These wells deplete very quickly, most of their significant output, in about a year. Replacing those takes money and time and a healthy economy.
The reserve calculation is based upon identified oil in place that can be produced. Reserves will increase when additional productive locations and rocks are identified. Unless you believe that every square mile has been drilled and sampled then you could not know that all reserves have been identified. Further development of production technology has made more reserves recoverable from old wells and has made known oil in place economic to produce. Both add to reserves.
The grade of oil from a well does not change as the well gets older or produces less.
Yes, there was a downgrade in estimates of reserves in California. However, there has been an upgrade in reserves in Pennsylvania as deeper formations have been drilled and tested. The total available hydrocarbon may be finite in the sense that it is confined by the size of the ball of the earth, however that total has certainly not been determined and several hundred years worth of production has been identified.
I can say, "I may be the weathiest man in the world by the time I die" and I would be right, but it does not connote any equation to reality. Reserves are the same. Again, reserves are not prodution. There is much oil in the arctic, but it is tough to get and very expensive in many ways. New production isn't easy. Or cheap.
True, the grade of the oil as a well depletes doesn't technically change. I was being lazy in my description. But the energy it takes to extract that oil from the extra chemicals and water and whatever else they need to use does make it more difficult and less attractive.
To be clear, I made my earlier comment in defense of Peak Oil. It's not a theory. Shell, BP, The Saudis and the US military all know this and indeed admit it. I really don't get why people get so pissed about it. It is demonstrable all around us, just like Wells Fargo and HSBC screwing over everybody in finance. Most just choose, for some reason, to deny it, in the same way, many on this very same site that will due thier due dilligence and research on the bankers. It's all the same to me.
Here are some papers you might find interesting on depletion: http://www.fraw.org.uk/files/energy/brandt_2011.pdf http://www.diva-portal.org/smash/get/diva2%3A338111/FULLTEXT01.pdfTh
"Reserves" is a term of art. See e.g.: http://www.spe.org/industry/docs/PRMS_Guidelines_Nov2011.pdf
Yes, thank you, Yao. It took me a second to understand what you meant... but then I read your link, the words in it too.... and understood.
For those of you that don't feel like reading Yao's link, it is a very detaild paper (200pgs.) that points out that "reserves" has essentially no meaning at all, and that everyone defines them differently, hence the "term of art" that he was referring to.
@ Agustus - It never ceases to amaze me how many people play this game with their own money and don't understand this fundamental fact.
I just love redneck ignoramuses who haven't put in the time, or don't have the ability, to understand the oscillating dynamics of a run-out of a -- any -- finite resource. Of course, you probably believe, also, that oil abiotically forms and gets flung out into the waiting arms of humanity as the Earth turns, which of course ignores just about every reputable geophysical observation over the past 100 years. But but but, 'Murika! 'Murika! 'Murika! Whatever.
Enjoy your cheap gas, bubba. You'll be right. Until you're not.
Now I know: The low is in. Thx GS.
What a load of Banker crap - funny how the financialisation of oil is missed in this 'oversupply' BS narrative - the truth is more simple - QE ends and the oil speculator rats (including Goldman) jump ship - the Bank for International Settlements show how and why;
https://www.bis.org/statistics/gli/glibox_feb15.htm
Chart is textbook dead cat bounce. Lots of bulls who can't give you one credible reason for their bullishness. $35 incoming
Not if Putin taps out during the Saudi chokehold.
Which he won't since he would rather perform a tracheotomy on himself rather than admit defeat...
Those Russkies can be a stubborn lot. Just look at the beating they took in WWII and kept on fighting anyway.
Russkies have no choice but to keep pumping
US frackers have no chjoice but to keep pumping
Canadain tar sands producers have no choise to keep on pumping.
Venezuala tar sand producers have no choice but to keep on pumping.....
Some seems to be short bigtime on oil :)
I think goldman just broke the record of posting about 1 topic in 2 months time.
AND THEY STARTED WHEN OIL BOTTOMED OUT AND STARTED TO RISE!
Game, set, and match.
http://www.bloomberg.com/news/articles/2015-02-13/this-chart-shows-why-t...
So many bulls after nothing more than a dead cat bounce. Nice set up for next leg down, easy money.
The cat hasn't finnished the bounce...
i really like the jabs and puns. Let's talk about facts?
Anyone long CL going into March, is going to break even, or slightly gain. The $usd is going to continue to soften as hot $ flow into euro.
Linux alt codes/ Pain in the butt.
Said differently, painting the take by abusing asymmetric leverage, knowledge of positions and control of the effective money supply is beginning to fail (oil has stabilized and we need it lower for longer to have our phantom/fraudulent financial claims on real flows of value wipe out more owners of real assets), so now we're using statistical methods to validate the market manipulation as "fundamentals".
It's surreal people. We need to exterminate the TBTJ institutions. Here's how you do it. Sell all long duration (20 years and more) financial "assets" including long bonds and Protection Rackets (NFLX, AMZN, etc) and convert them to 50% cash OUTSIDE TBTJ and 50% gold. It will squeeze those who've run the fractional reserve banking financial asset ponzi instead of them squeezing everyone else.
I want .99 cent gasoline. Anyone remember when gas was .99 cents.
I remember getting angry when it hit $1.15 and have paid sub $1.00. I paid $1.99 today, and a few weaks ago it was $1.65 here.
In 1971 I was buying gas for .25 a gallon
Have to include natural gas in these charts. Not including that makes any analysis meaningless.
Oil is well nigh worthless but as a refined product has many uses. Long before oil prices collapsed (as production soared and demand remained constant) natural gas volumes soared even more...causing and even more spectacular price collapse.
Since Wall Street will only invest in a product whose price they can manipulate (higher) natural gas headed straight for the local utilities to generate electricity with. This caused a global price collapse in coal.
And still natural gas production soars.
That can make for creating some VERY valuable distillates.
Gasoline is not one of those.
Fast squeeze to 60ish, then new lows.
I don't know about $60, but I agree with the squeeze, so long as it is understood that some muppets will be getting stomped by GS being on the other side.
The last dive had two head fakes. We haven't seen the first yet.
44 => 53
Almost 20%
Oil prices will plummet like interest rates because the economy is in the shitter like never before. Soon you can fill up your recovery tank and get paid to drive to lala-land. Game over bitchez. Some nervous chewing on buffalo's and gardening is all that's left. Soon.
How many big drops over the the past few months came from Saudi jawboning?
They seem to have zipped up. Data is a sideshow at the moment. Wait till someone starts speaking again.
And isn't it funny how hard Goldman are trying to do their own jawboning now?
Well already know that the price is only driven by the financial contracts being traded on ICE/CME/NYMX and has no bearing on physical supply/demand.
monthly oil puts into perspective how much this market is internally wrecked
bullandbearmash.com/chart/wti-oil-monthly-closes-sharply-weak-bounce-50s-coming-month/
resistance around 57.00 - enough for the hopeful crowd to get long before we move down to 25
.....comment deleted on account it seems more productive to get high and laid right now than continue reading the same GS BS.......
Goldman is typically wrong. The average price of oil over the next several years will likelly be higher than $50 but who cares if it gets back to $100 or not.
Goldman is typically wrong. The average price of oil over the next several years will likelly be higher than $50 but who cares if it gets back to $100 or not.
Riiiight. Because in a world where the very time value of money is manipulated, as policy, only supply and demand could be the key determinants of a 60% plunge in the world's most important commodity over a six month period.
Goldman Sachs, using sp500 as a measure of economic activity, predicts lower oil prices... Time to go long ?
Yeah But "the Market" looks out into the future and is pricing in a powerfull recovery... BTFATH
I wouldn't trust Goldman to tell anything that didn't greatly benifit them first. This chart seems way to elastic.
Zero hedge, you do Goldmansach believe in now?