Goldman Losing Faith in $100 Brent as WTI Spread Seen Wider

Goldman Sachs Group Inc. says it’s losing confidence in its forecast that Brent crude will recover to $100 a barrel next year.

While the Wall Street bank is maintaining its projection for now, it says that a lack of signs of accelerating global economic growth and uncertainty over OPEC’s production plans amid rising Libyan output are weakening its conviction. Brent, the benchmark for more than half the world’s oil, closed at $93.42 a barrel yesterday, the lowest in more than two years.

Prices slumped as U.S. crude production climbed last month to the highest level since 1986 and the Organization of Petroleum Exporting Countries pumped the most oil in a year. The International Energy Agency cut its projections for global consumption growth through next year due to a weakening economic outlook while Saudi Arabia lowered prices this week, signaling the world’s biggest exporter is prepared to let them fall rather than cede market share.

“Given the lack of strong catalyst for higher prices, the path of least resistance seems for further declines,” Goldman analysts including New York-based Jeffrey Currie said in an e-mailed report. “However, the downside from here starts to become limited as further declines in Brent prices would help rebalance the oil market, incentivizing stronger demand growth and weighing on production growth in the U.S.”

Brent for November delivery was 39 cents higher at $93.81 a barrel on the London-based ICE Futures Europe exchange, at 3:29 p.m. Singapore time. Futures plunged 16 percent in the three months to Sept. 30, the worst quarterly performance since June 2012. They have declined 15.3 percent this year.

WTI Spread

West Texas Intermediate, the U.S. benchmark grade, for November delivery was at $91.52 a barrel in electronic trading on the New York Mercantile Exchange, bringing its decline this year to 7 percent.

WTI’s discount to Brent shrank to $2.41 yesterday based on settlement prices, the smallest since August 2013. The spread is “far too narrow given logistic economics” and needs to “widen,” Goldman said in its report.

At this level, the spread will boost U.S. imports, increasing inventories on the Gulf Coast and at Cushing, Oklahoma, the delivery point for WTI, Goldman said. The bank forecasts the difference will rebound to $10 a barrel in 2015.

Goldman’s conviction in its 2015 Brent forecast is waning due to “lack of tangible signs of sequential acceleration” in global economic growth, including in China, during the second half of 2014, it said in the report.

Economists have cut estimates for this year’s gross domestic product growth in China after data on industrial profits, factory output and credit showed a deteriorating outlook.

The Asian nation will account for about 11 percent of global oil demand this year, compared with 21 percent for the U.S., forecasts from the IEA in Paris show.

Brent Recovery

The chance of a price recovery to Goldman’s $100 forecast for 2015 may also be capped if longer-term prices, which have risen this year, catch up with the slide in prompt contracts, the bank said.

“Stabilizing geopolitical risk and growing perception of a demand-constrained oil market could well combine to reverse some of this remaining $4 a barrel year-to-date rally in five-year forward Brent prices,” it said.

Brent’s decline probably isn’t sustainable, data compiled by Bloomberg show. On the weekly chart, the relative strength index has dropped to 27.4, the lowest level since June 2012, when futures fell to an 18-month low of less than $90 a barrel. Readings below 30 typically signal a market is oversold and may rebound.

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