Tyler Durden: While large shifts in positioning precipitated a sell-off in oil prices that far exceeded the actual weakening in fundamentals, Goldman Sachs’ confidence in a 2015 oversupplied global oil market has increased.
As a result, they have brought forward their medium-term bearish oil outlook (WTI crude oil forecast is $75/bbl for 1Q15 and 2H15 (from $90/bbl previously)). WTI just broke below $80 back to June 2012 levels once again as Goldman also downgraded the entire oil service space (happily buying up muppets’ positions as they sell).
As Goldman Sachs notes,
While oil inventories had remained stable since mid-2012 on the offsetting forces of: (1) strong US shale oil production growth, (2) rising OPEC supply disruptions, and (3) modest demand growth, 2014 has seen this precarious equilibrium unravel with: (1) continued strong US production growth against expectations for a slowdown, (2) OPEC disruptions easing with Libya, Iran and Nigeria increasing production, (3) a slowdown in global economic growth and oil demand in 2Q14. These shifts led to a large year-to-date build in OECD petroleum, the largest since 2006. While this sequential build in OECD total petroleum inventories has helped offset the deficit observed in 2H13, inventory levels remain below their 5-year averages, even when factoring in the IEA’s preliminary counterseasonal September build in inventories. Importantly though, we now believe that the dynamics behind this rise in inventories are sustainable and will lead to a significant further build in inventories in 2015.
On the supply side, we believe that: (1) non-OPEC production growth outside of North America is set to accelerate on continued growth in offshore production, (2) prior to recent declines in prices, US Lower 48 oil and NGL production was on track to sustain production growth near 1.0 mb/d in 2015, and (3) core-OPEC will not cut production significantly in coming months. On the demand side, while we believe that one-off factors have exacerbated the weakness in 2014 oil demand growth, the acceleration in demand that we expect in 2015, even under lower prices, is not sufficient to offset the strength in supply.