Goldman’s Currie Sees Oil Staying Below $50 as Surplus Lingers

Don’t count on a big rally in crude oil, said Jeff Currie, head of commodities research at Goldman Sachs Group Inc. Or any rally, for that matter.

Two years into an oil rout that saw West Texas Intermediate oil fall to about $26 a barrel in February, the risk is “to the downside” because there aren’t any clear catalysts to push up prices, Currie said in an interview in Lake Louise, Alberta. For the next 12 months, he said, oil is likely to trade in the $45-$50 range.

In May, Goldman cut its 2017 forecast for oil prices to $53 a barrel from $58 as producers became more efficient and Saudi Arabia, Russia and Iran boosted output more than expected. A “modest” supply deficit in the market is forecast to turn to a surplus early next year, Currie said Wednesday.

“It really looks similar to the period of the early 1990s, when we were at $20 oil,” he said. “Is $45 to $50 the new $20? I am not ready to say we are in this new equilibrium environment, but it sure does feel like we’re moving in that direction.”

Market Share

West Texas Intermediate futures dropped $1.32 to settle at $43.58 a barrel on the New York Mercantile Exchange Wednesday, the lowest close since Sept. 1. Prices plunged from $106 reached in summer 2014 after the Organization of Petroleum Exporting Countries failed to curtail output amid a surge of U.S. shale oil in an effort to defend market share.

The International Energy Agency and OPEC have issued reports this week indicating the glut will persist longer than previously thought. The IEA said Tuesday that oil stockpiles will continue to accumulate through 2017 amid slack demand in India and China. On Monday, OPEC predicted that supplies outside the group would grow next year rather than fall, as previously forecast.

OPEC producers are scheduled to meet with non-OPEC producer Russia in Algeria Sept. 27 to discuss freezing or capping output levels. While it behooves the producers to reach an agreement to show cohesion, any action will do little to support prices, Currie said. The advent of shale oil, which can be brought on or taken off the market more quickly than conventional oil, has undermined the group’s effectiveness.

“The flat supply curve for oil has neutralized the ability to manage this market,” he said.

Resolving Disruptions

Adding to the potential for lower oil is the prospect that current disruptions will be resolved. Prices rallied since February amid curtailments in Canada after May wildfires and disruptions in Nigeria, Libya and Iraq.

While international oil companies have curtailed capital expenditures, investments made when oil was over $100 means new capacity is due to come online for most of the rest of the decade with the “sweet spot” being 2017 and 2018, Currie said. Even when the cuts take effect by about 2020, it won’t necessarily mean higher oil prices.

Low-cost producers such as Saudi Arabia and Russia will probably raise output to “offset some of that loss,” he said. “Then the question is how much of that high-cost production gets reconfigured and brought online anyway, at lower costs? You’re seeing that happening, re-engineering of large-scale projects to get them below $50 a barrel.”