Goldman has done it again: less than two weeks after the bank said "oil prices have likely hit bottom of the price range, and look attractive" when it slashed its WTI price target from $55 to $47.50 (and every other Wall Street bank promptly followed), in a note released overnight by its analysts including Damien Courvalin and Jeffrey Currie, the central banker incubator has effectively thrown in the towel, and writes that while its 3 month base case price target remains$47.5, it warns that absent a "shock and awe" production cuts from OPEC, oil could tumble below $40/barrel.
First, Goldman explains that the market remains, gasp, volatile and could move down as well as well as up:
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.
And then the punchline:
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.
Goldman specifically envisions the growing output from Libya and Nigeria, and warns that unless OPEC engages in further "shock and awe" cuts, the next stop is lower:
OPEC production and exports increased in June, driven by Libya and Nigeria which have sustained production above our expectations over the past few weeks. While OPEC has yet to address this increase in production, the group has invited both countries to participate in the next compliance committee meeting on July 24. We continue to believe that there is another opportunity for OPEC to increase the cuts, but that this should be done in a “shock and awe” manner, with little public announcement. This requires further patience in assessing the group’s response to higher aggregate production and lower prices.
The problem, as we discussed yesterday, is that deeper cuts are currently not on the agenda, according to OPEC Secretary-General Mohammad Barkindo. Still, the group and other nations have invited Libya and Nigeria to a July 24 meeting in St. Petersburg, Russia, on July 24 to discuss the stability of their production, according to Issam Almarzooq, Kuwait’s oil minister.
As to whether this means that the "suddenly" skeptical Goldman, which as we sarcastically pointed out was selling oil throughout its entire "bullish phase", is now finally buying WTI, consider that Gartman remains bearish and do the math.
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The balance of Goldman's note below:
No signal yet for an oil price inflection
- The decline in US inventories last week was both historically high and larger than expected. This decline helped US inventories return below their end of May level, with inventory data outside of the US pointing to continued normalization. In fact, the month of June featured larger than seasonal inventory declines for regions where we have weekly stock data (US, ARA ports in Europe, Japan and Singapore). Since the end of February, such high frequency inventories have declined by 55.2 mb vs. a seasonal pattern of an 27.1 mb build.
- While encouraging, we believe however that the market’s cautious reaction to such draws is warranted given the increase in Libya and Nigeria production. Further, this week’s US data will likely feature smaller draws:
- US oil inventories (excluding NGLs and SPR) tend to fall strongly in the week preceding July 4th, likely on pre-stocking ahead of the holiday (stocks held at the retail level are not counted in the EIA inventory data). Historically, the week including July 4th, for which the EIA will report data this coming Wednesday, sees much smaller draws, 5.65 mb less vs. the prior week.
- Further, US SPR sales amounted to only 0.4 mb in last week’s EIA data. SPR data since then shows that sales from government into commercial stocks will be larger this week at 2.6 mb, further undermining the draws in Wednesday’s upcoming data release.
- We remain optimistic on global oil demand growth this year. The weekly US demand data has remained ambiguous in June:
- Last week’s data featured record high oil implied demand o but this was driven in large part by “other oil” with little read through to broader demand.
- At the same time, we believe that the concerns over US gasoline demand are overdone, with the EIA weekly data offering an imperfect measure of consumption. As we showed earlier this year, weekly ethanol data offers a better measure of the final US monthly gasoline consumption data, and implies that US gasoline demand grew by 60 kb/d in June.
- The US oil horizontal rig count rebounded last week after posting its only second decline this year the week prior, in hindsight potentially due to end-of-quarter deferrals:
- The guts of the rig data show an only gradual deceleration in HY producer rig count, with private producers rig count rebounding and IG producers continuing to ramp up strongly. We believe the coming month will be key to testing whether producers are responding to the signal of $45/bbl WTI prices.
- The US E&P earnings season which starts at the end of the month will also be important in assessing the US shale response to lower prices and the magnitude of the ongoing efficiency gains.
- OPEC production and exports increased in June, driven by Libya and Nigeria which have sustained production above our expectations over the past few weeks. While OPEC has yet to address this increase in production, the group has invited both countries to participate in the next compliance committee meeting on July 24. We continue to believe that there is another opportunity for OPEC to increase the cuts, but that this should be done in a “shock and awe” manner, with little public announcement. This requires further patience in assessing the group’s response to higher aggregate production and lower prices.
Given that the market is now out of patience for large stock draws and increasingly concerned about next year’s balances, we believe that price upside will need to be front-end driven, coming from observable near-term physical tightness and signs of a US shale activity slowdown on a sustained basis in coming weeks.