There has been some confusion overnight whether Goldman, in a note released overnight, is calling for a new "bull market" in oil and commodities in general.
Goldman did not call for a bull market. This is what it did say.
While Goldman has long been one of the bigger bears on commodities in general, and oil in particular, earlier today, the firm's energy analyst Jefferie Currie released a note that offered a faint glimmer of hope for oil bulls. This is what he said:
In oil, most of the demand improvement to lower prices occurred in 2015, and non-US supply reductions have been extremely modest, while in the US supply is only down about 150,000 b/d yoy as of year-end. In metals, supply has yet to materially come off as it is simply too easy to store excess output. What this suggests is that the key theme for 2016 will be real fundamental adjustments that can rebalance markets to create the birth of a new bull market, which we still see happening in late 2016.
Ok so new "bull market"... eventually... maybe. For now, however, Currie explains why $20 oil is not the firm's base case yet: "while the surplus in oil continues to pressure oil timespreads wider and reversed the WTI-Brent spread as European surpluses are moved to the US Gulf Coast where spare storage exists, we still aren’t adopting the $20/bbl scenario as our baseline forecast since balances have not deteriorated further following our mid-December update."
So will Goldman adopt the $20/scenario once a few dozen million Iranian barrels make landfall in the US? We'll wait to find out. For now Goldman is sticking with its $40/oil forecast which in light of today's oil price action may seem a little aggressive:
Barring a supply or demand/weather shock that shifts the balance by more than 340,000 b/d we don’t see the oil market hitting storage capacity constraints, which is why we are maintain our $40/bbl WTI price forecast for 1H16.
Putting this all together, Goldman's conclusion is the following:
While we clearly don’t take a strong stand on spot commodity prices from these levels, we do take a strong view on selling longer-dated commodity prices today. Furthermore, we will turn bullish once the forward curves flatten, as we expect later this year in energy, to incentivize inventories back into the market to accommodate expected deficits. In the meantime, however, the fundamental shifts in energy and metals supply that we believe need to happen will likely occur in three phases: 1) the survival phase, which we just ended with the capitulation of several large offshore producers this week, 2) the inflection phase, which we are now entering, where the least fit producers engage in significant capital restructuring, including the sale if possible or potential shuttering of assets, and 3) eventually the regeneration phase of a new industry with stranded assets ultimately shuttered or optimized. We believe the inflection phase will characterize 1H16; however, once it happens we will likely move quickly into a period where inventories draw and forward curves flatten. At what price level this occurs is still wide open to debate, and we believe the 3D’s will continue to create downside risks until commodity supply adjustments break the negative feedback loop and start the path towards balanced markets.
In other words, what Goldman really said is that once enough capacity is taken offline, there will be a recovery and here is how to gauge the advent of said "recovery" in terms of oil forward curves when determining the difference between a "sell-off" phase and a "recovery":
Well, yes: this is not rocket science and has been repeated by everyone over the past year. The question is when this "inflection phase" will flush all the excess capacity, and according to Currie who was speaking moments ago on CNBC, it could take 9 months at the earliest before the inflection phase ends. Then again, it could take far, far longer considering the length of time it has taken to push unprofitable producers into bankruptcy.
And herein lies the rub, because the more energy suppliers go into bankruptcy to remove the excess supply which is the critical condition of Goldman's upside case, the greater the shock will be among the banking system which is clearly underreserved for a mass default wave. To wit, just moments ago Wells admitted that it is among the most exposed banks to the energy sector:
- WELLS FARGO HAS $17 BIL OF OUTSTANDING ENERGY LOANS: CFO
One can be confident that Wells would be less than enthused about the oil "bull" phase to emerge only for the bank to be forced to eat billions in losses, which perhaps expains the following follow up comment from the CFO:
- WELLS FARGO CFO SAYS HE ‘CAN IMAGINE’ OIL PRICES NOT IMPROVING
To summarize Goldman's "bull thesis" for oil: yes, there will be a bull market, and oil prices will rise, but first one must prepare for a default wave either domestically, or among the marginal oil producing countries.