By Mark Melin
With oil in a state of backwardation – the future price is higher than the current spot price, sometimes considered a positive sign for those wanting higher prices – Goldman Sachs says not so fast. In a commodities research note yesterday, the investment bank’s commodities research team predicted a U-shaped price model to come as they eye a future $40 WTI price target, down nearly $10 from today’s pricing levels.
Goldman Sachs blames oil price on unpredictable weather
As the price of oil plunged during the fourth quarter of 2014 and then stabilized in early 2015, inventory began to tighten as prices found a floor from their freefall. Goldman Sachs oil analysts Damien Courvalin, Jeffrey Currie, Anamaria Pieshacon, Raquel Ohana and Caroline Lu attributed the inventory tightening to weather and mid-east political turmoil.
It was Iraqi sandstorms in the beleaguered Islamic nation that was in part the cause for hampering oil production, the report noted. Another weather related cause assigned to explain the temporary price stabilization in oil was cold weather in the U.S., as some regions, such as Chicago, having tied its coldest February on record and New York City experiencing its third coldest on record, pointing to increased demand.
While no mention was directly given in the report to ISIS militants cutting the country in half and ravaging the brittle democracy, the report cited “weather, violence or sanction-related supply disruptions in Iraq, Libya and Iran” as taking 885,000 barrels of oil off the market per day.
The weather-related demand increases could be short lived, as “normal” weather in Iraq could see an additional 300,000 barrels of oil per day tip the supply and demand scale; as well, Iran could potentially add nearly 265,000 barrels per day to the supply picture in April, the report noted.
While the supply picture is increasing, the Goldman report also noted that, while still forecasting a “strong demand recovery in 2015,” there could be “a sequential deceleration in demand growth” as spring approaches.
Watch for altering timespreads
Anticipating “sequential weakness in fundamentals” and a resumption in global crude inventory builds, the Goldman report noted an expectation “Brent oil prices and timespreads to reverse their recent strength,” which could ultimately lead to $40 oil and an inverted U-shaped price configuration. Goldman analysts appear to be keeping an eye on the $40 – $65 price range in oil as many hedge fund traders are separately anticipating chopping price trends in the near future.
Perhaps among its more interesting points, the Goldman report noted continued strong appetite for energy related investments despite the dramatic fall in oil, with private equity capital raised year to date in 2015 at its highest level since 2003. In other words, plenty of dry powder to invest in energy related ventures to keep the oil flowing.