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Goldman Fears Crude Oil's Self-Defeating Rally
Market rebalancing derailed by price rally...
The oil market rebalancing has started: weak prices in 1Q15 pushed producers to cut capex while supporting demand. This led to a recovery in prices further fueled by relief that US crude stocks would not breach capacity, strong demand and rising Middle East tensions. The rise in prices was further supported by oil screening as cheap relative to E&P equities, drawing cross-asset investors into buying crude.
But, as Goldman Sachs details below, while the rally in oil prices has closed the valuation gap to equities, these trade on historically high multiples and oil itself is now trading at a premium to its own still weak fundamentals in our view.
Goldman therefore views this rally as derailing this rebalancing and setting the stage for sequentially weaker prices, especially with oil speculative length as long as when oil traded at $100/bbl.
..given still weak current and forward fundamentals
First, while US crude builds turn to draws, it is total petroleum stocks that matter, as rising product stocks will depress refining margins and weigh on crude prices.
Second, our updated supply and demand balance points to an only gradual decline in elevated inventories in 2016 as production growth from low-cost producers such as Saudi, Iraq and Russia help offset strong demand growth and declining non-OPEC ex. US production. Further, we don’t see the US rig curtailment as large enough yet to put production on a persistent downward trend with risk to our flat Iranian production path skewed to the upside.
Third, we believe that WTI oil prices settling above $60/bbl will eventually lead US producers to ramp up activity, draw down a large well backlog and hedge, given improved returns with costs down by c.20%.
Fourth, the broader imbalance of too much capital looking for opportunities in the energy space remains intact
The imbalance of too much capital looking for opportunities in the energy space remains intact. For example, the combined dry powder for M&A from the three US oil majors and of North America natural resources private equity funds currently stands at $150 billion, above our analysts forecast capex for the US E&P sector in 2015.
While ultimately, the long-run asset value of shale oil reserves bodes well for their ability to attract capital, capital investments are now part of the adjustment process given the collapsed time lag shale has created between when capital is spent and when production rises. With credit and equity access not currently part of the adjustment process, the market has one lever left to balance itself: cash flow through oil prices. This large availability of low-cost external capital therefore exacerbates the need for sustained low prices in our view to keep US producing assets from quickly being redeployed in a lower cost environment.
Sequential price decline still required
As a result, while low prices precipitated the market rebalancing, we view the recent rally as premature with crude oil prices expensive relative to current and forecast fundamentals. Ultimately, with evidence at hand that US producers responded aggressively to low prices, the burden of proof has shifted to how they will respond to the recent recovery and whether low-cost producers can sustainably deliver higher production.
This may as a result delay the sequential decline in prices until this fall, especially as we approach a period of seasonally stronger summer demand.
Calling the timing for prices to sequentially decline is challenging in the short run as we approach a period of seasonally stronger summer demand and China SPR fill. Nonetheless, we expect evidence of this fundamental weakness and expected US producer reaction to gradually materialize in the US weekly rig count, hedging flows, weakening refinery margins and monthly OPEC production and rig count growth.
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Source: Goldman Sachs
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Oil and the dollar have an inverse relationship.
Move on.
Goldman was calling for $30 crude on March 11, so I'd say their credibility on this topic is as close to zero as posible: http://www.cnbc.com/id/102496363
Not to mention they didn’t say anything about the drop from 100 happening, but that doesn’t mean they didn’t see it coming. Their credibility never existed to me.
This is the root cause of the drop in oil prices. It will take 18-24 months before there is a real cut in supply to support prices.
Everyone keeps saying this CRUDE MARKET IS ABOUT to crash, and the S&P - what a load of crap.
This chart says otherwise ==> http://www.bit.ly/1fMcakI
I think GOLDMAN are doing the exact opposite to what they say, and profits each time. It must piss people off. But who really knows right?
Energy is still very very oversold here. Lots of upside potential.
All of yield curve-steepening is leading to some speculation that regional banks will benefit; the SPDR Regional Banking ETF closed at its highest levels since March 2014.
And higher yields in developed markets attracts funds from emerging market currencies.
Time to load up on the frackers. If they couldn't make any money with oil at $110, then you'll love them with oil at $60
Muppet talk
Oh wow rig counts don't matter again!
Goldman say sell, so that is a buy signal. I wish the released this back at $50 when I was considering buying!
$NG_F is being a bitch too, took my short stops out - fuckers!
That's how *they* trade. Once there seems some general agreement/consensus on what *should* happen and which direction price should take in a normal market, the opposite happens. They move price to max out stops to the upside (shorts burning) and downside (bull mauling). Pretty disgusting really. They paint the tape such that there is always a bone thrown for the bulls, and one for the bears, so that they continue said looting.
well thats BS
Wait a minute, is this the same Goldman that said oil was going below $40 when it was last at $45?
Yep, that’s the one.
“One day, one day”, said the blind squirrel, “I’m going to find me a pine nut”.
Well Goldman is correct, but that doesn't matter since speculators looking for a quick buck piled into paper oil.
Look at the oil chart since January, is that type of movement supposed to be normal?
The world market is flooded with oil. The Chinese are buying as much as they can for storage, not for use.
But, since all the contracts are correlated and gasoline futures never caught down to oil, they skyrocketed to a higher price than they have ever been compared to a barrel of oil. $3.00+ gasoline on $60 oil is insane.
....and Goldman said to sell AOL before the weekend and those who did left $10+ on the table......
Best trading advice: When Goldman says "buy" then sell and vice versa.
I don't trust Goldman's politics or motivations because they are controlled by you know who.
But I think that they may be directionally correct on this short term call.
Oil moved pretty quickly off the bottom, and economic support for a sustained short term rally from this level seems less likely now. I am more bullish on oil long term.
The problem is, if we really think that we have been lied to and that we are in a recession, it is hard to get very bullish on oil in the short term. There was a lot of demand destruction on oil back when it was trading over $100 that may never come back to the same degree.
Oil, while it has intrinsic value, is different than PM's. It is bulky, which means if you extract it you have to put it somewhere. If a production surplus continues, it may cap upward price pressure in the short term.
Also, in my view, some of the weakness in oil recently (back when it had a $40 handle) was manufactured by cabal paper shorts to punish Russia by depriving it of foreign exchange. When that gambit did not work, they covered - but that is pretty much behind us.
Political events that we haven't seen yet could change my assessment. Also, if the dollar tanks, I would definitely change my assessment for obvious reasons.