‘Mark It Zero!’: Goldman Says Oil Could Head ‘Below $40’

Goldman has seen enough.

We’ve said this a couple of times over the past several days, but we’ll say it again: if those inventory numbers we got last week weren’t enough for crude to stage a sustainable bounce, then that suggests there’s a crisis of confidence here.

And indeed we got still more evidence to support that contention on Monday when the market didn’t seem to care that OPEC is now looking at capping output from Libya and Nigeria, the two members whose production has been a thorn in the cartel’s side.

Just to remind you of how this all went down, oil careened into a bear market late last month, then staged an impressive rally, only to see the bottom fall out again last week and here we are today.

So yeah, against that backdrop, Goldman is out on Tuesday morning with this:

While US oil inventories posted a large draw last week, we find that high frequency oil data is not yet providing a clear signal for oil prices to move sharply out of their recent trading range.

As a result, we see symmetrical risks of higher or lower moves in the short term as data volatility continues to impact sentiment.

As we laid out last week, we believe that sustained trends in inventory draws and US rig count declines or evidence of further OPEC actions will be required for prices to rally, which remains our base case with our 3-mo WTI forecast at $47.5/bbl.

Given the recent rebound in net speculative length from its 18-month lows, we believe, however, that a failure for these shifts to materialize soon could push prices below $40/bbl as the market tests OPEC’s and shale’s reaction functions. Importantly, we wouldn’t expect such a move to be volatile, as it is not driven by storage concerns like last year (with available storage capacity given the 2017 draws) but the ongoing search for a new equilibrium.

The bank also rehashes their “shock and awe” theory about what OPEC needs to do to “correct” this. For those who missed the original note on that, you can read the details here: “OPEC’s Next Move Should Be ‘Shock And Awe.’”