Oil prices nearing capitulation – Goldman Sachs

Analysts at Goldman Sachs point out that oil prices sold off sharply recently, with Brent spot prices settling near $47/bbl, their lowest level since before the OPEC cuts were announced last November.

Key Quotes

“Given the lack of any significant oil data releases, we see two forces at play in this sell-off: (1) a follow through on the sharp declines in copper and iron ore the day before on concerns over growth in China, and (2) once again, the influence of technicals and positioning, this time likely driven by negative gamma effects and timespread liquidation. Despite this latest move lower and an already disappointed consensus view on the pace of oil rebalancing, our assessment of oil fundamentals suggests that rebalancing progressed further in April. We further expect inventory draws to accelerate, supported by our expectation for robust demand growth, despite recent concerns and potentially further helped later this year by the building consensus among OPEC producers on extending the cuts.”

“While this leads us to expect an eventual sequential recovery in prices, it is important to note that the anchor around which this rebound will occur continues to drift lower. Specifically, the most noteworthy move in oil prices over the past week and past year in our view remains the steady decline in long term oil prices, likely reflecting (1) growing visibility on the sources of future supply, (2) continued positive earnings surprises of E&Ps and majors, and (3) growing evidence of the ability of US shale to respond near $50/bbl and the availability of capital to support such activity. This faster decline in long-term oil prices than we expected this year is a clear downside risk to our spot price level forecast, even if it helps slow US production growth and achieve the inventory draws and the rotation of the forward curve into backwardation that we forecast.”