Goldman Sachs says oil could fall to $20 a barrel

The investment bank cited global over-supply and concern about the Chinese economy

Oil prices fell on Friday after Goldman Sachs said a global surplus could drive prices to as low as $20 a barrel. The investment bank cited over-supply and concern about the health of the Chinese economy.

While that wasn't the base-case scenario, failure to reduce production quickly might require prices near that level to clear the oversupply, it said in a report. "The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016," Goldman analysts, including Damien Courvalin, wrote in the report. "We continue to view US shale as the likely near-term source of supply adjustment."

Brent for October shed 20 cents at $48.69 a barrel as of 00:34 GMT. US crude, also known as West Texas Intermediate, lost 29 cents at $45.63 a barrel.

For the global surplus to end by the fourth quarter of 2016, US output would need to decline by 585,000 barrels a day, with other non- Organization of the Petroleum Exporting Countries (Opec) production falling by a further 220,000 barrels a day, Goldman Sachs said.

Joining a long list of banks cutting their price forecasts, it reduced its 2015 US crude oil forecast to $48.10 a barrel, down from $52. It cut its 2016 forecast for US crude from $57 to $45.

The agency cut its 2015 Brent crude oil price forecast to $53.70 a barrel from $58.20 and said it saw 2016 Brent prices at $49.50, against its earlier forecast of $62.

Largely, investors ignored a relatively bullish report from the International Energy Agency (IEA). The agency said a move by major Opec exporters, led by Saudi Arabia, to defend their market share by not reducing production appeared to be working. "Oil's price collapse is closing down high-cost production from Eagle Ford in Texas to Russia and the North Sea," IEA said in its monthly report.

It added the closure of some non-Opec oil production "might result in the loss next year of half a million barrels a day - the biggest decline in 24 years".

Goldman said, "We now believe the market requires non-Opec production to shift from our prior expectation of modest growth to large declines in 2016…The uncertainty on how and where that adjustment will take place has increased."

Core Opec members see no reason to cut production, despite the fall in oil prices. Saudi Arabia thought a summit of oil-producing countries would fail to produce concrete action toward defending prices, said sources familiar with the matter.