Oil dips to 11-year low; Goldman Sachs, CLSA see $20 levels

With crude oil prices losing nearly 50 per cent from their peak levels and touching 11-year lows on Monday, Goldman Sachs and CLSA have said the prices could further fall to touch $20 a barrel.

Brent crude oil dipped to $36.05 a barrel, its weakest since July 2004, before recovering slightly to $36.56 a barrel as of 10 pm IST on Monday. West Texas Intermediate (WTI) crude in New York slid 1.4 per cent to $34.23 a barrel, said agency reports.



The slide comes amid fears of a slowdown in global growth, which could impact oil demand coupled with a supply glut, and the Organization of the Petroleum Exporting Countries (Opec) holding production steady. Analysts expect the prices to continue sliding further over the next few months.

In a recent note, Christopher Wood, managing director and equity strategist at CLSA, maintained a bearish view on oil and expects it to hit the $20-a-barrel mark going ahead.



“With oil having now broken through the key psychological $40 support level, which the bulls were hoping would be the bottom, it is appropriate for ‘GREED & fear’ to repeat the bearish view maintained here and lower the formal target to $20. It remains remarkable one year after the oil collapse began how little the US production has come down as the marginal cost of shale continues to decline,” Wood says.

Adding: “US crude oil production peaked at 9.61 million barrels per day in early June and has since fallen by only 4.5 per cent to 9.18 million recently. It also remains hard to see why anyone should expect Opec pricing discipline to be restored when Saudi Arabia and Iran are engaged in a war via proxies in West Asia.”

Analysts at Goldman Sachs also say that with the prices now below their three-month $38-a-barrel West Texas Intermediate, or WTI, forecast, they still see high risks that prices might decline further, as storage continues to fill.



Beyond positioning and the extrapolation of OPEC’s lack of decision on a new target ceiling and on how to accommodate higher Iranian production, fundamentals have also continued to deteriorate, they believe.

“Our base case remains that the global oil stock build will on aggregate remain shy of storage capacity, although the storage buffer has once again narrowed. But this re-balancing is far from achieved: (1) the US rig count and E&P (exploration & production) guidance remain too high to achieve the required supply decline; (2) we see risks to our OPEC production forecast of 32 million barrels/day next year as skewed to the upside (Iran); (3) storage continues to fill with the odds of hitting storage constraints by the spring rising,” said Damien Courvalin, Abhisek Banerjee and Raquel Ohana of Goldman Sachs in a recent report.



Adding: “As a result, we reiterate our concern that ‘financial stress’ may prove too little too late to prevent the market from having to clear through ‘operational stress’ with prices near cash costs to force production cuts, likely around $20/barrel.”

Analysts also remain sceptical regarding a pick-up in oil consumption going ahead given global growth concerns, especially in China.



“A significant slowdown in China would have a large impact on global growth, driving the baseline global GDP growth forecast in 2017 to 1.8 per cent from 3.1 per cent. As a result, oil prices and short-term interest rates would remain lower for longer. In the slowdown scenario, Brent crude oil prices would remain at or below $55 per barrel through year-end 2018,” said Robert Grossman, Bill Warlick and Jonathan Boise of Fitch.

“Fitch acknowledges the potential for further supply and demand shocks in the global energy market to drive crude oil prices well below these forecast levels. Any rise in US and euro-zone short-term interest rates would be pushed out,” they add.