Goldman Sachs see risk of oil ‘in the teens’ as producers run out of storage

Oil could drop below US$20 a barrel as the look for a level that brings supply and demand back into balance makes prices much more volatile, Goldman Sachs Group Inc. predicted.

With ability to store oil exhausted in some places, prices may need to drop low enough to prevent crude output that may no longer be stockpiled, said Jeff Currie, Goldman’s head of commodities research.

“When you breach storage capacity, prices need to spike below cash costs as you have to shut in production almost immediately,” Currie said within an interview with Bloomberg Television. Volatility will surge and he “wouldn’t be surprised if the market goes into the teens.”

West Texas Intermediate, the U.S. crude benchmark, traded near US$30 a barrel on Tuesday, having slumped to a 12-year low near US$26 on Jan. 20 as rising OPEC output and resilient U.S. shale production intensifies a worldwide glut. Prices will swing between US$20 and US$40 a barrel within the next 6 to 9 months because the re-balancing process plays out, Currie said.

The storage sites most likely to operate out of space are “landlocked,” such as Cushing, Oklahoma, the delivery point for U.S. crude futures, Currie said. Inventories at Cushing reached 64.Two million barrels in the week to Jan. 15, the highest in data in the Energy Department that extend to 2004.

The bearish outlook from Goldman chimed with that presented through the International Energy Agency in its monthly market set of Tuesday. The global oil surplus is going to be bigger than previously estimated within the first half, increasing the risk of further price losses, as OPEC members Iran and Iraq bolster production while demand growth slows, the Paris-based IEA said.

Different Cycle

While price swings are set to increase, the oil slump doesn’t seem likely to derail the global economy, Currie said.

“The difference today versus other cycles previously is that we’ve many risk-sharing arrangements set up,” Currie said. Flexible exchange rates in Russia to liquid markets for high-yield debt in the U.S. are made to result in the economic climate safer, he said.

There’s no visible “connection between what’s happening within the commodities space and creating system risk,” Currie said.

Bloomberg.com