Friday, September 11, 2015

Izabella Kaminska On This Morning's Goldman Oil Forecast

Well young lady, good to have you back in the game.

Before we get to the topical here's a walk down memory lane, September 2012 vintage:
"By 2015 hard commodity prices will have collapsed"

That Pettis prognostication followed, by a couple hours, "The Death of Commodities":
I'm tempting the fates aren't I.
Well, this blog isn't exactly BusinessWeek 1979 and besides, the Death of Equities cover was actually smart advice for the three years to August 1982.
Anyone in the commods has to have been scared of the long side this week. From the grains collapsing on the hint that corn yields would be a little bit better than the apocalyptic famine scenarios being pitched to the dentist in Peoria trying his hand at corn futures to the 2.2% drop in October platinum on news of the Lonmin settlement to Monday's massive "Holy air pocket, Batman"* selloff in the oil pits** it appears that folks (and 'puters) are so skittish that they dump contracts as if they cause cancer.
So what's going on?
There appears to be a lot of physical stuff in the world and producers and merchants know it. 
Here's one part of the puzzle, from FT Alphaville's Izabella Kaminska: Commodity encumbrance and Joseph’s storage play...MORE
While in July 2012 it was: "the biggest commodity and carry arbitrage of all time".

What I'm getting at is, she's no doubter-come-lately having been dubious of the price signals from the petroleum and other complexes for a while now, something I also pointed out in December 2014's "Commodities: 'Who will buy my sweet red copper?'":
...That post linked to another by FT Alphaville's Izabella Kaminska who was already, at that early date, distrustful of the price signals that commodities were sending and who, a couple months later made a connection between gold and TIPS that pretty much eliminated the hope of an upside for gold...
October WTI $44.35 down $1.57; Brent $47.38 off 3.1%.
And here is the latest, from FT Alphaville:

Why it’s not an oil breakdown story, it’s a money story

In their latest research note out this Friday, Goldman Sachs’ commodity analysis team headed by Jeff Currie is now so bearish on oil they think even investment grade E&Ps may have to cut production if any sense of balance is to be restored.
As GS note:
Oil prices have declined sharply over the past month to our $45/bbl WTI Fall forecast. While this decline was precipitated by macro concerns, it was warranted in our view by weak fundamentals. In fact, the oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016 on further OPEC production growth, resilient non-OPEC supply and slowing demand growth, with risks skewed to even weaker demand given China’s slowdown and its negative EM feedback loop.
Oh dear. So, even Goldman Sachs have been caught by surprise. (Inconceivable – we know).
Here’s Goldman’s new outlook for oil prices:
Given our updated forecast for a more oversupplied oil market in 2016, we are lowering our oil price forecast once again. As previously, we continue to view US shale as the likely near-term source of supply adjustment given both the short cycle nature of shale production and the importance of capital as the new margin of adjustment. Our new 1-, 3, 6- and 12-mo WTI oil price forecast are $38/bbl, $42/bbl, $40/bbl and $45/bbl from $45/bbl, $49/bbl, $54/bbl and $60/bbl previously. Our 2016 average price forecast is now $45/bbl vs. $57/bbl previously and the forward curve at $51/bbl.
On our updated forecast, we expect the sharp deterioration in producer financial conditions that has occurred recently to persist on the recognition that the rebalancing of supply and demand is proving to be far more difficult than previously expected and that such stress is needed until evidence that US shale production growth is required. As a result, we now forecast that US Lower 48 crude and NGL production will decline by 585 kb/d in 2016 with other non-OPEC production down 220 kb/d to end the global oil market oversupply by 4Q16....MUCH MORE
Do follow that link, I'll wait.
From there we head off to her "Oil absolutely friggin everywhere", also from this morning's FT Alphaville:
The monthly IEA oil market report puts things about as simply as they can be put:
As they note:
The big story this month is one of tightening supply, with the spotlight firmly fixed on non-OPEC. Oil’s price collapse is closing down high-cost production from Eagle Ford in Texas to Russia and the North Sea, which may result in the loss next year of half a million barrels a day – the biggest decline in 24 years. While oil’s recent volatility has been unnerving – Brent crude jolted from a six-year low below $43 /bbl to above $50/bbl in the space of days – the lower price environment is forcing the market to behave as it should by shutting in output and coaxing demand....MORE
Now, being fashion-forward as we are, after a year of blathering about supply, we are trying to peer around the next corner, demand, not the last three corners as the IEA is wont to do.

From Aug. 21's "DoubleLine's Jeff Gundlach: If oil goes to $40 a barrel, something is 'very, very wrong with the world'":
...I mentioned yesterday that approaching the balance issue from the supply perspective had kept us on the right side of the trade for most of the decline but it's probably time to start digging into demand for whatever information we can glean....
So there you go. And if you'll excuse me, there I go.
It's New York Fashion Week, here's the Wall Street Journal's Heard on the Runway column:
New York Fashion Week Recap: Day One