Moments ago, following last week’s torrid crude oil price rebound driven entirely by now-denied hopes of some production cut consensus between oil suppliers, namely Russia and Saudi Arabia, oil halted its four-day rally as weak Chinese manufacturing data added to economic demand concern.
“The risk seems to be the greatest on the downside again” and speculation of OPEC production cuts has “faded fast,” says Saxo Bank head of commodity strategy Ole Hansen. “China and South Korea are both helping the market return to fundamental focus where it is worried about demand.”
But the biggest downward catalyst overnight as noted previously, was not demand concerns but a return of oversupply fears following a note by Goldman’s Damien Courvalin who warned quite explicitly that “cuts are unlikely” in what Goldman dubs the New Oil Order, and that in the current rebalancing phase, oil prices will “remain between $40/bbl (financial stress) and $20/bbl (operational stress) until 2H16. This phase will be characterized by a highly volatile and trend-less market with the price lows likely still to be set.” But most importantly Goldman writes that “given the likely time necessary to enact such cuts, the continued large builds in US and global inventories and the fast pace at which US Gulf Coast spare storage capacity is filling, it may already be too late for OPEC producers to be able to prevent another large decline in prices.” Here’s why:
The past week featured headlines suggesting that OPEC producers and Russia would meet in February to discuss a potential coordinated cut in production. Despite the sharp bounce in oil prices that these headlines generated, we do not expect such a cut will occur unless global growth weakens sharply from current levels, which is not our economists’ forecast. This view is anchored by our belief that such a cut would be self-defeating given the short-cycle of shale production and the only nascent non-OPEC supply response to OPEC’s November 2014 decision to maximize long-term revenues. As a result, we reiterate our view that prices need to remain low enough to force fundamentals to create the adjustment back towards a new equilibrium. We believe this inflection phase requires oil prices to remain between $40/bbl (financial stress) and $20/bbl (operational stress) until 2H16. This phase will be characterized by a highly volatile and trend-less market with the price lows likely still to be set.
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