Oil’s collapse into a bear market is excessive because there’s no oversupply to justify the selloff, according to Goldman Sachs Group Inc.
The bank is “near-term constructive about prices” after they fell too much, too soon, analysts including Jeffrey Currie, the head of commodities research in New York, wrote in a report e-mailed today. While expectations of a glut have driven down crude, the risk of a near-term shortage may increase as forward prices of benchmarks including West Texas Intermediate and Dubai crude discourage stockpiling, it said.
Oil futures slumped to the lowest in four years in London amid the highest U.S. output in almost 30 years and weakening global demand growth. Members of the Organization of Petroleum Exporting Countries are responding by cutting prices, prompting speculation that they will compete for market share rather than reduce production.
“The ‘supply glut’ is not yet here today, it exists in expectations,” the Goldman analysts wrote. “Prices have likely overshot to the downside.”
The lower prices go, the tighter the balance between supply and demand will become, Goldman said. With every 10 percent drop in oil prices, consumption grows by 0.15 percent, the bank estimated. Brent crude’s slump of almost 30 percent from its June peak may mean additional demand of almost 500,000 barrels a day, according to the bank.
This demand response means “pricing in the future can be self-negating,” the analysts wrote. Dubai crude gained this week as more Asian buyers entered the market, the bank said. “In the current environment we believe the risks are skewed to the upside” for prices.
Futures are paring losses as other banks including BNP Paribas SA and Bank of America Corp. predict the rout may be over. West Texas Intermediate, the U.S. benchmark crude, rose as much as 1 percent to $83.52 a barrel in New York today, extending yesterday’s rebound from the lowest price since June 2012. Brent for December settlement was little changed after advancing 2 percent yesterday in London.
Goldman said its long-term outlook for oil remains bearish because of a combination of cost deflation and technological improvement, and the sharp rise in U.S. shale output combined with improving supplies from countries outside OPEC such as Brazil.
Saudi Arabia, OPEC’s biggest producer, should no longer be seen as the first producer to act to balance the market, the bank said. U.S. shale oil production can easily be increased or decreased, making it the most probable “first swing barrel” to respond to price changes, according the bank.
If a glut materializes, WTI would need to drop below $80 a barrel “for an extended period of time” to prompt a slowdown in U.S. exploration and production, Goldman said.
“Given the high level of volatility and uncertainty, we believe commodity markets will calm at least temporarily until evidence of oversupply is seen in rising inventories,” the report said.-Bloomberg