Goldman Expects ‘Swift, Violent’ Oil Rally After Low Near $30

Goldman Expects ‘Swift, Violent’ Oil Rally After Low Near $30


By Grant Smith

Jan. 19 (Bloomberg) -- Goldman Sachs Group Inc. commodity analyst Jeffrey Currie said he expects energy prices to have a “swift and violent rebound” in the second half of the year after slumping to near $30 a barrel.

Oil prices may test the low of $32.40 reached in mid- December before rebounding to $65 by the end of this year, the analyst said. In the short term, “bearish fundamentals” will dominate as the support from the conflict in Gaza and Russia’s gas dispute subsides, Goldman said in report e-mailed today. There is scope for a “new bull market” in oil, Currie said.

World oil demand is likely to fall by about 1.6 million barrels a day this year, the Goldman analyst said today at a conference in London. That’s bigger than the reduction expected by the International Energy Agency, which last week forecast a drop of about 500,000 barrels a day, or 0.6 percent.

“Thirty dollar oil reflects the same imbalances that got us to $147 oil,” Currie said at the conference. “The problems haven’t gone away. We still believe the day of reckoning is to come.”

Infrastructure constraints throughout the oil industry, from supply to transportation and storage, mean that despite the demand slump, “this is not 1982-1983 all over again,” Currie said. “The supply picture’s radically different, the demand picture’s radically different.”

“The key difference is that today there are no large-scale next generation projects that are going to save the world,” he added. “Commodity demand is exponentially higher than it was.”

New York crude futures for delivery in December, trading near $56 a barrel today, currently cost some $15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery.

Contango Flatten

The contango is likely to flatten as supply cuts by OPEC and other supplier take effect, reducing the availability of oil for immediate delivery, and as producing countries sell futures contracts, Currie said.

A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is “difficult” to profit from and is “near the end of this process” anyway, the Goldman analyst said.

Traders seeking to exploit this contango structure face the problem of either finding a location willing to harbor their tanker for a prolonged time, difficult for environmental reasons, or else spending part of their profit on fuel to keep the ship in motion.

The Organization of Petroleum Exporting Countries started another round of supply cutbacks at the start of this month. The group’s compliance with its overall efforts to cut production will probably peak at 75 percent, or a reduction of about 3 million barrels a day out of an announced aim of 4.2 million barrels a day, Goldman Sachs said.

Canada, North Sea

“If OPEC production cuts turn out to be sufficient, then we’ve probably already seen the bottom,” said Currie.

Countries outside OPEC, in particular the U.S., Canada and North Sea producers, will restrain output by 600,000 barrels a day, Currie said. Non-OPEC cuts will have a deeper price impact than those by OPEC because they involve an actual reduction in investment, rather than just output, that shutter oilfields for a longer period, he added.

In several steps, 10 OPEC members have pledged to reduce production to 24.845 million barrels a day, a cut of 4.2 million barrels a day from September’s level.

 

Does this mean we should expect lots of consolidation and lowered volatility with a slight downward drift?

 

Does Goldman have some kind of crystal ball that we're not aware of?

 

after bouncing back from $200, of course

 

Just a few weeks ago....after the worst call of 2008....oil $200....GS mentioned that they are no longer going to be making oil price forecasts....

They must need the money ?

How about GS being absorbed by a US Nationalized bank in 2009/10 ?

Since brokers can be replaced by a few web pages....and since the markets are going 24/7 fully electronic....and listings will become more boilerplate and low cost...with periodic internet based factual reporting....

Why should GS be around in the months ahead ?

The securities market is headed towards truly universal electronic accounts that are going to be supported by the new nationalized banks....

To GS....good night....over with the public media games already....

 

good translation.

 

Exactly. All we know is, the market price considers known data and expectations. GS is one out of many, and we saw what their $200 prediction was a bit off...

 

Oil prices may test the low of $32.40 reached in mid- December before rebounding to $65 by the end of this year, the analyst said.

With that damned contango in oil, I don't see how anyone can make much money at all on this prediction. The Dec '09 contracts are already tradng at $55.

The oil ETFs don't move up when one contract expires and the next takes over, even though that means an ~$5 jump in CL because of the contango between one contract and the other. Then, the current CL contract dives down to take care of that little gap in the spot price, taking the ETFs with it. Putting the ETF holder with a net *loss* even though oil is now the same or up slightly.

I can't figure out a way to play it except intramonth unless you're one of the oil tankers sitting there holding oil buying it at the front month and then selling a contract for a different month.

Anyone else that has any ideas, let me know.

 

So we're hovering around $40 right now, and a move to $65 in a year is a "swift, violent oil rally" in the eyes of the GS analyst? I wonder what adjectives they used to describe the recent oil bubble.

 

No, they are just long.