Alex Mills
By Alex Mills
An oversupply of crude oil, primarily created by the increase in production in the U.S., has caused a 20 percent decline in price in a matter of weeks, according to two companies involved in analysis of crude oil markets.
Goldman Sachs, one of the best known companies following in the futures market of crude oil, announced on Oct. 26 that it projects $75 per barrel for the first quarter of 2015 for West Texas Intermediate (WTI) down from its previous forecast of $90.
Goldman Sachs also forecast $85 per barrel for Brent down $15 from its previous prediction of $100.
“Our forecast path reflects our expectation that timespreads will be weakest in the second quarter of 2015 when the global oversupply will be largest with Brent prices reaching $80 per barrel and WTI prices $70 per barrel,” Goldman Sachs stated in its report called “The new oil order.”
Morgan Stanley, another of the top analyzing companies, is a little more optimistic that prices will not fall much farther.
“Despite the recent sell off in crude pricing, we see several positive developments emerging in the physical markets,” their report issued on Oct. 13 stated. “Even if OPEC is not overly responsive before year-end (which we expect), fundamentals have turned, which should eventually lift crude prices.
“Calling the bottom is difficult, and macro fears and rumors could continue to pressure crude. However, we see the potential for a positive bounce into year-end, particularly given extremely bearish sentiment and positioning,” the Morgan Stanley report stated.
Morgan Stanley said crude oil demand should rise during the fourth quarter of 2014.
Both reports agree that OPEC, especially its largest exporter Saudi Arabia, will play an important role in what happens regarding worldwide crude oil supplies.
Morgan Stanley said that assuming supply delivers as scheduled, OPEC will likely have to cut its quota 500,000 barrels per day in 2015 and 2016 to balance the market.
However, Goldman Sachs stated that OPEC’s pricing power has diminished, because of the increased oil production in the U.S., which needs to slow to keep supplies more in line with demand.
“U.S. shale is the marginal swing barrel in the new oil order,” according to Goldman Sachs.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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