Goldman Sees Risk of Oil Below $20

Goldman’s Currie Expects Oil Volatility to Go Higher
  • Capacity to store crude `breached' in some parts of world
  • Volatility to `spike' as market seeks price for rebalancing

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

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

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

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

The storage sites most likely to run out of space are “landlocked,” such as Cushing, Oklahoma, the delivery point for U.S. crude futures, Currie said. Inventories at Cushing reached 64.2 million barrels in the week to Jan. 15, the highest in data from the Energy Department that extend back to 2004.

The bearish outlook from Goldman chimed with that presented by the International Energy Agency in its monthly market report on Tuesday. The global oil surplus will be bigger than previously estimated in 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 in the past is that we have many risk-sharing arrangements put in place,” Currie said. Flexible exchange rates in Russia to liquid markets for high-yield debt in the U.S. are all designed to make the financial system safer, he said.

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

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