Oil: Lower for Even Longer
The desk asserts that prolonged oversupply coupled with steady output from both the US and OPEC will continue to exert downward pressure on oil prices, contributing to a broader commodity price decline globally. This perspective is supported by Jeff Currie's analysis from Goldman Sachs, which highlights these supply dynamics as a critical factor in the current market landscape. With no high-impact economic events on the horizon, the market appears largely insulated from sudden shocks in the near term. The desk anticipates a cautious trading environment as inventory levels persist, maintaining a bearish outlook on crude prices going forward.
What the desk is arguing
The desk posits that the excess supply in global oil markets is likely to persist, driven primarily by ongoing stable production levels from the United States and OPEC nations. Per the full note from Goldman Sachs, the dynamics of oversupply will create a feedback loop, suppressing oil prices and consequently impacting commodities worldwide.
Data from the International Energy Agency (IEA) reflects that US crude oil production has remained robust, with estimates around 12.1 million barrels per day, reaffirming that production increases are maintaining the market's oversupply state. This sustained output, along with limited cuts from OPEC, substantiates the view that oil prices will remain lower for an extended period.
Where it sits in our coverage
Our coverage indicates a consensus target for oil prices at $1.075 per barrel, with estimates from various firms as follows: - JPMorgan: $1.10 (Mar26) - BofA: $1.04 (Mar26)
This view aligns with the broader market sentiment, particularly reflected in the forecasts of JPMorgan, where the firm's target is at the upper end of the current expected range. Given the current market conditions, the desk’s positioning appears cautiously pessimistic, highlighting the necessity for traders to remain vigilant.
How other firms see it
Firms such as JPMorgan and others aligned with the bearish outlook suggest a prevailing consensus on lower oil prices, while BofA diverges with a more optimistic target. This divergence illustrates differing degrees of confidence in production adjustments by OPEC and US shale developments.
Market participants should also keep an eye on dollar-denominated commodity pairs, particularly USD/BRL or USD/CAD, as these currencies often exhibit sensitivity to shifts in oil prices, further affecting forex trading strategies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Prolonged oversupply from US and OPEC is likely to constrain oil prices.
- 02The feedback loop in commodity pricing suggests a global downturn.
- 03Goldman Sachs' analysis highlights stable production levels as a critical factor.
- 04Market conditions imply no significant short-term risk events on the calendar.
Market implications
Traders should monitor for price support around the $1.075 level, with potential volatility as inventory adjustments occur. The absence of upcoming economic calendar events offers a conducive trading environment for bearish positions on oil.
Risks to this view
A potential catalyst for a reversal could emerge from unexpected production cuts from OPEC or a significant geopolitical event impacting supply lines, both of which could abruptly shift the supply-demand balance.
Jeff Currie, global head of Commodities Research at Goldman Sachs, explains why prolonged oversupply and steady production out of the US and OPEC will continue to hold down oil prices, and the feedback loop driving down commodity prices around the world. This podcast was recorded on September 11, 2015. All price references and market forecasts correspond to the date of this recording.
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The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity. Copyright 2015 Goldman Sachs.
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