Goldman keeps baseline case for WTI at $40 a barrel

As oil prices slid below the $30 mark, Goldman Sachs said it still sees “the birth of a new bull market” in commodities.

The bank, which came under the spotlight recently for suggesting oil prices could fall as low as $20 a barrel in a worst-case scenario, maintained its baseline case for West Texas Intermediate at $40 a barrel for the first half of this year.

GS said it still wasn’t adopting the $20 a barrel scenario as its baseline forecast as balances have not deteriorated further since its mid-December update.

Goldman said that barring a supply or demand/weather shock that shifts the balance by more than 340,000 barrels a day, it doesn’t see the oil market hitting storage capacity constraints.

“The key theme for 2016 will be real fundamental adjustments that can rebalance markets to create the birth of a new bull market, which we still see happening in late 2016,” it said.

It pointed out that US supply is only down by about 150,000 barrels per day year-on-year as of year-end, while non-US supply reductions have been very modest.

“Real fundamental adjustments have always taken time due to physical frictions inherent in supply chains, labour contracts, and the opportunity costs associated with shutting down a mine, field or plant.

“This is the basis of real option theory, which argues that prices will likely overshoot financial costs to the downside before producers have an incentive to reduce output. And, just as in oil, metal prices have recently dropped below our targets suggested by financial economics.”

Goldman said the possibility that tensions in the Middle East, particularly in Saudi Arabia and Iran, would create a supply disruption that rebalances the market more quickly than expected, was remote.

“It is important to emphasize that geopolitically generated supply disruptions are generally the result of a civil war that physically disrupts output, as no one wants to lose the revenue.”

Oil prices were under pressure again on Friday, falling below the $30 level again. West Texas Intermediate slumped 4.9% to $29.66 a barrel and Brent crude slid 3.5% to $29.79, having hit a fresh 12-year low.