Goldman Calls For $20 A Barrel Oil Due To Weak Demand And Global Oversupply

Goldman Calls For $20 A Barrel Oil Due To Weak Demand And Global Oversupply

Due to the consistent decline in oil prices week after week, Wall Street heavyweight Goldman Sachs has had to modify its price forecasts for the commodity as it does not appear that price support is anywhere in sight.

While the decline in oil prices is good for consumers, in the form of lower gas prices, lower airfares, reduced home heating costs, it is not necessarily good for the global economy as a whole.

The problem is simply a case of supply and demand. With respect to oil, there is a major oversupply and increasingly less demand. Essentially, the world’s surplus of oil is even greater than Goldman Sachs initially thought and the trend could lead to a major drop in oil prices to just $20 per barrel.

In a statement the company said that, “The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016 on further [Organization of Petroleum Exporting Countries (“OPEC”)] production growth, resilient non-OPEC supply and slowing demand growth, with risks skewed to even weaker demand given China’s slowdown and its negative emerging market feedback loop.”

The company further stated that, “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.”

The sources of stress on the industry include an abundance of oil coupled with a lack of storage space. Goldman estimates that the oil industry added approximately 240 million barrels of petroleum to available storage tanks between January and August of this year.

The company projects that available storage capacity (outside China) is about 375 million barrels coupled with an inventory build of about 240 million barrels.

Goldman further elaborated that “In the event that storage fills faster than we forecast or capacity is lower than we model, the potential downside to our oil price forecast from hitting storage capacity is significant.”

Given the current situation, Goldman modified its one-month, three-month, six-month and 12-month oil price forecasts to $38, $42, $40 and $45 per barrel. Those figures are down from its previous predictions of $45, $49, $54 and $60.

Additionally, the company modified its 2016 average price forecast from $57 down to $45 per barrel.

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