U.S. Oil Output May Slow If WTI Drops Below $90: Goldman

West Texas Intermediate crude may be nearing a price floor because a move below $90 a barrel would prompt some U.S. producers to reduce drilling, according to Goldman Sachs Group Inc.

WTI futures traded near $92 a barrel today after plunging 13 percent in the three months ended yesterday, the U.S. benchmark’s biggest quarterly drop in more than two years. Prices are close to a level that would make production unprofitable for some companies in higher-cost places such as North Dakota, Goldman’s head of commodities research, Jeff Currie, said in London today.

“U.S. producers may lay down rigs and slow production if WTI keeps falling below $90,” Currie said in an interview during the World Commodities Week conference. The potential for oil prices to fall further is also “limited” because of threats to supply, particularly in Libya, Currie said.

Goldman Sachs estimates that WTI will trade at about $90 a barrel in three months, while Brent, the European benchmark, rebounds to $100. Brent traded at about $95 a barrel on the ICE Futures Europe exchange today in London.

“The downside is limited, unless the economic situation outside the U.S. deteriorates further,” Currie said.

Disappointing economic growth in China would mean that Brent might miss the target, Currie said. Concern that China is slowing, coupled with the strengthening U.S. dollar, sparked a selloff across commodities yesterday that pulled oil lower, he said. WTI fell 3.6 percent yesterday to $91.16 a barrel, the biggest drop since November 2012, according to New York Mercantile Exchange data.

More Bearish

“The picture’s a tad more bearish,” Currie said. “Our baseline view is an acceleration in demand into 2015 and slightly lower production. My conviction in our baseline view is waning with recent macro data.”

China’s manufacturing remained subdued last month as the world’s second-largest economy was weighed down by a property slump. The government’s Purchasing Managers’ Index was at 51.1 in September, the same as August’s reading.

A pullback in manufacturing, declining industrial profits, and factory-output growth at a five-year low point to a deepening economic slowdown. Economists surveyed by Bloomberg predict China will expand 7 percent in 2015, the slowest pace since 1990.

Supply Threats

“The political situation in Libya is one of the most tenuous we’ve seen since unrest first erupted,” Currie said.

The holder of Africa’s biggest oil reserves remains divided politically even as its production has tripled to 780,000 barrels a day last month from 250,000 a day in May, according to data compiled by Bloomberg. Its internationally recognized government shifted to the eastern city of al-Bayda and a different administration allied with Islamist militias has seized control of the capital, Tripoli.

The nation’s production, currently at about 900,000 barrels a day, was disrupted last month by protests at the Gialo field and a rocket attack that damaged the Zawiya refinery, according to Mohamed Elharari, a spokesman at National Oil Corp.

“You lose some of Libya, China shows an acceleration, you get a slight reduction in Saudi Arabian production, and the market would be back up to $100,” Currie said.

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