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Page added on January 29, 2016

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Why Goldman Sachs Says $30 Oil Isn’t Proof of Weak Demand

Consumption

Oil’s collapse to $27 a barrel last week spurred concern that, on top of the existing oversupply, the market is facing a demand crisis. Goldman Sachs Group Inc. thinks that’s wrong.

Over the past six weeks, long-term oil futures — for deliveries in five years’ time — have fallen even harder than prices for immediate supplies. That’s a sign to Jeff Currie, Goldman Sachs’ head of commodities research, that the latest rout wasn’t driven by fading oil consumption. When demand is weak, that gap — or timespread — would widen rather than narrow, he says. “Recent price declines are not demand driven, but rather driven by structural supply forces,” he said. “Time-spreads in Brent and oil products have strengthened, not weakened, and weakening time-spreads are characteristic of demand-driven price declines.”

So if a demand shock wasn’t the culprit, then what did push prompt crude to its lowest in more than a decade? It’s still comes down to excess supply, according to Currie. Meanwhile, longer-term prices have slumped for other reasons, most notably producers hedging sales, and some consumers choosing to abandon their own safeguards against higher prices.

The pressure from low prices is already causing “binding constraints on the oil market,” straining producers’ ability to both access capital and finance their daily operations, Goldman says. That will ultimately lead crude markets to a “new equilibrium,” which Goldman has previously forecast will mean the emergence of a new bull market.

“We’re now in the right zip code in terms of prices that are creating the adjustment process,” he said.

Still, the re-balancing process will be “both protracted and arduous,” with prices swinging between $20 and $40 a barrel throughout the first half before order is restored, Currie predicts.

bloomberg



28 Comments on "Why Goldman Sachs Says $30 Oil Isn’t Proof of Weak Demand"

  1. Plantagenet on Fri, 29th Jan 2016 11:20 am 

    Good to know Goldman sachs has figured out the world is in an oil glut.

    Cheers!

  2. adamc18 on Fri, 29th Jan 2016 11:27 am 

    Maybe…. the November agreement in Paris is having an effect? If the whole world is going to continually tighten up on CO2 emissions in coming years, there is obviously going to be no increase in the price of oil, coal and natural gas because the demand will dwindle and they will become worthless…. maybe?

  3. Plantagenet on Fri, 29th Jan 2016 12:04 pm 

    @adamc18

    There is nothing in the Paris agreement requiring reductions in CO2 emissions. The Paris agreement is an agreement to keep global T increases below 2°C—but there is nothing in it about how this is to be accomplished and thee are no requirements to reduce FF use or reduce CO2 emissions. Its a classic example of magical thinking!

    Cheers!

  4. Lawfish1964 on Fri, 29th Jan 2016 12:36 pm 

    Keep dreaming, Adamc.

  5. penury on Fri, 29th Jan 2016 1:02 pm 

    More B S from the usual source. I appreciate the fact that they do admit to knowing nothing, and maybe it will take a while to figure it out.

  6. Dredd on Fri, 29th Jan 2016 2:45 pm 

    Why Goldman Sachs Says $30 Oil Isn’t Proof of Weak Demand

    “Proof” is an arrogant word, “evidence” is a better word to use (Questionable Scientific Papers – 5).

  7. twocats on Fri, 29th Jan 2016 4:01 pm 

    There is nothing in the Paris agreement requiring reductions in CO2 emissions. The Paris agreement is an agreement to keep global T increases below 2°C—but there is nothing in it about how this is to be accomplished and thee are no requirements to reduce FF use or reduce CO2 emissions. Its a classic example of magical thinking! [plant]

    Do you have any source for that assertion? If you are right there is a hell of a lot of misinformation going on out there. Granted the emissions reductions are only vaguely binding and the deadlines are mostly around 2030 (for China, Japan, and EU), and are compared to 2005 levels, which I’m assuming were fairly high. So I’ll give you that the Paris agreement is pretty awful, but to claim it doesn’t talk about reducing emissions, I really haven’t heard anyone say that, even from people staunchly opposed to the deal.

  8. ennui2 on Fri, 29th Jan 2016 4:14 pm 

    “Good to know Goldman sachs has figured out the world is in an oil glut.”

    If only peakers (like PStarr) would realize it.

  9. Outcast_Searcher on Fri, 29th Jan 2016 4:25 pm 

    adamc18 said:

    Maybe…. the November agreement in Paris is having an effect? If the whole world is going to continually tighten up on CO2 emissions in coming years, there is obviously going to be no increase in the price of oil, coal and natural gas because the demand will dwindle and they will become worthless…. maybe?

    And maybe wishful thinking will result in purple unicorns that poop flowers ruling the earth.

    NO part of the Paris accords has countries agreeing to actually reduce any burning of fossil fuels. Just vague promises to supposedly limit world temp. growth in 15ish years, with NO obligations to anyone.

    What part of real world events leads you to fossil fuels going away (i.e. becoming worthless)?

    Americans rushing to buy giant trucks and SUV’s now that “gas is cheap”?

    Widespread predictions like from the EIA that show fossil fuel consumption increasing by 2040 (along with more green energy as global energy demand continues to increase)?

    The fact that people continue to want to spend all they can both earn and borrow to improve their lifestyle, and are willing to do almost nothing re AGW if it impacts them economically? (Shown by both surveys and behavior)

    The fact that except for in 2008-2009, global consumption of oil has continued to increase?

    If your comment had ANY real connection with reality it wouldn’t be so clueless.

  10. Boat on Fri, 29th Jan 2016 4:26 pm 

    short,

    So Goldman Sachs now says what has been obvious and I have been saying all along. The glut is overproduction. Nothing to do with weak demand. Seems to me there are many others with a differing opinion, with PHD’s, than yours. How is that 3 year collapse going for you. It’s just month one out of 36. No time to panic yet.

  11. shortonoil on Fri, 29th Jan 2016 5:09 pm 

    “short”

    Are you talking to yourself again? I haven’t commented on this thread?? I didn’t intend to either; its Goldman Sachs, the talk your book bunch. Anyone with a brain that has more than two neurons firing knows that. Must be the ghost of depletion is following you around?

  12. onlooker on Fri, 29th Jan 2016 5:10 pm 

    This is BS, demand destruction has occurred and that is what allowed this oil glut to exist. Debt and impoverished consumers around the world are the canary in the coal mine that the world went to far with the lending and with the downsizing and becoming more competitive which is a euphemism for cutting costs at the workers expense.

  13. twocats on Fri, 29th Jan 2016 5:49 pm 

    ron patterson recently put out the charts on consumption figures:

    http://peakoilbarrel.com/a-surprising-look-at-oil-consumption/#more-10261

    {I’m honestly asking if anyone disagrees with them, i’ve heard lots of different takes on the numbers.) But anyway, it seems to me that a large part of the story is that the vast majority of increases in consumption, certainly for the last 7 years when this shale oil bonanza kicked into high gear, occurred in Asia, Oceania, and the Middle East. And most of that probably being China and India. And a majority of THAT consumption was probably infrastructure (building cities, what not, some of which now stands empty), manufacturing, and capacity for manufacturing (which has dropped significantly). So the gamble of oil producers that demand would remain high has not happened. Now we can argue all day over why that’s happened: inorganic growth from QE, debt burdens, income inequality, and on and on. But it seems clear that global demand is not strong enough to sustain asset valuations including and particularly for energy. So to sum up: a glut, a drop in demand, and a global downturn, all at the same time.

  14. Apneaman on Fri, 29th Jan 2016 6:28 pm 

    Das Boat, always put your faith and trust in Goldman Sachs.

    How Goldman Execs Screwed Their Clients and Lied to Congress

    http://www.rollingstone.com/politics/pictures/how-goldman-execs-screwed-their-clients-and-lied-to-congress-20110511

    Goldman Sachs Misled Congress, Duped Clients, Levin Says

    http://www.bloomberg.com/news/articles/2011-04-14/goldman-sachs-misled-congress-after-duping-clients-over-cdos-levin-says

    Goldman Sachs Will Pay $5 Billion To Settle Financial-Crisis Claims

    http://www.npr.org/sections/thetwo-way/2016/01/14/463107541/goldman-sachs-will-pay-5-billion-to-settle-financial-crisis-claims

    Goldman Sachs Says Sorry For The Housing and Credit Crisis

    http://www.cbsnews.com/news/goldman-sachs-says-sorry-for-the-housing-and-credit-crisis/

    Das Boat if Lloyd Blankfein told you blowing him would be good for your portfolio, would you do it?

  15. shortonoil on Fri, 29th Jan 2016 6:42 pm 

    “patterson recently put out the charts on consumption figures:”

    Stating demand without identifying where that demand is originating makes no sense. Petroleum has two sources of demand. 1)The demand for oil needed to produce oil, 2) and the demand from the general economy. Lumping them both together tells one almost nothing about the true impact of that demand. One is a function of the efficiency of the production process and quantity of oil and its products produced. The other is totally a function of the state of the general economy. The two lag each other by a considerable period of time, and that time period could be constantly changing. Stating a number at some point in time for demand tells one nothing about all the other time data points. It simply boils down to an exercise in arithmetic. Ignoring the relationship between two variables that affect a third; the output, is a red herring in disguise.

  16. DMyers on Fri, 29th Jan 2016 8:22 pm 

    This article does not support the oil glut point of view. Interesting to note how “oil glut,” per se, is completely ignored while a new term for the phenomenon is slipped in. Note the following terminology from the article.

    “Recent price declines are not demand driven, but rather driven by structural supply forces,”

    Get that: structural supply forces? I can assure you, this ain’t talking about a glut. Because, first of all a glut is a glut, and it’s very simple to employ that term where it applies properly. A “structural supply force” is clearly not a glut, or they would have called it a glut. In fact, it strikes me that this term may describe something in the narrow realm between the living and the dead.

    They throw this term out with no explanation or reference as to what it is or contains. I suspect this opacity is for a reason. No one really knows what goes into structural supply force. It is in fact a waste basket category awaiting a full description.

    On the perimeter of this, however, is an astute mention of the “time-spread” of long term futures against the short term. The argument is that this spread does not, for technical reasons, indicate that the current price weakness in oil is a result of weak demand.

    So, the weak demand theory of plummeting oil prices is debunked, and in its place we accept a “structural supply force” as the mysterious have all and be all of the mysterious decline in oil prices.

    Goldman is apparently taking the patently rational view that low prices will lead to lower production, which will lead to lower supply in relation to demand.

    This, of course, eventually leads to “the emergence of a new bull market.” Now, tell me that doesn’t send a little chill down your spine. We have to acknowledge that Goldman avoids any mention of supply or demand as a context. Rather they favor the term “new equilibrium”. Their goal is to convince everyone to BTFD!

  17. twocats on Fri, 29th Jan 2016 8:23 pm 

    if demand for oil need to produce oil was so large we wouldn’t have a glut.

  18. twocats on Fri, 29th Jan 2016 8:23 pm 

    *needed

  19. Nony on Fri, 29th Jan 2016 10:45 pm 

    Goldman shows sounder microeconomic intuitions and communication of them than James Hamilton did.

  20. GregT on Fri, 29th Jan 2016 10:52 pm 

    “microeconomic intuitions”

    So what are you trying to say Nony? Microeconomic intuitions would be liken to voodoo magic, chicken bone tossing, or Tarot Card reading. None of them have any grounding what-so-ever in reality.

  21. Apneaman on Fri, 29th Jan 2016 10:52 pm 

    Nony, they deserve to swing.

  22. makati1 on Sat, 30th Jan 2016 12:59 am 

    Ap, lets have a “Goldman Sacs Day” at the guillotines and execute every one of them. That would take out most of the banksters in all of the places of power, like the IMF, many government officials, many of the Central Banksters of the world, etc. A good start anyway. Throw in all of the billionaires on “Billionaires Day” and the world would be a better place. Sure beats celebrating Ground Hog Day or wasting time on the Super Bowl.

    “The FBI and local authorities have stepped up security surrounding Super Bowl 50, including F-16 fighter jets, helicopters and K-9 teams, CBS Local reported Wednesday.”

    http://www.ibtimes.com/super-bowl-50-terrorism-threat-f-16-fighter-jets-fbi-k-9-units-helicopters-ready-2282525

    Only in Police State America.

  23. GregT on Sat, 30th Jan 2016 1:20 am 

    That’s pretty sad when a country’s military needs to defend a football game. It really doesn’t get any more surreal than that.

  24. joe on Sat, 30th Jan 2016 6:05 am 

    GS cant say it publically, but like LIBOR the oil price is totally rigged. Stupid people like to imagine we live ij this thing called free market capitalism but thats a bigger lie than than Obama saying he never saw the growth of ISIS as a result of his support for anti-Assad forces. PNAC, ‘securing the realm’, remapping the middle east. Every recession is intended to recoup money for banks in the general economy. Globally banks have more in saving deposits than they have on their loan books, the process began in 07, when they jacked up the interest rates and burst the housing bubble, now they want to repeat that ‘busines cycle’ again. Its all rigged. Even refugees are part of the plan. Germany and France have navies and nukes and armies, yet they let millions of muslims from ISIS and Iraq and central Asia simply pass through their borders and airports. The truth is much more hidden than people think. Its always sombodies agenda, they tell YOU that you need to make room, but sombody is always making money and they dont care about you, they dont care if you die.

  25. Davy on Sat, 30th Jan 2016 6:31 am 

    “That’s pretty sad when a country’s military needs to defend a football game. It really doesn’t get any more surreal than that.” More like sad that in a world where we have enormous challenges ahead we allow events like this to take place period and Ditto for the rest of the world. The Olympics today is out of control. How about that Olympic carbon meter. I bet it will be spinning like a top.

    There is nothing wrong with these games and events in a local non energy intensive setting. The resources that are going into the super bowl are vast. These are the types of activities we must stop if we care about our future and the Earth. Discretionary consumerism and high energy leisure are poor lifestyles with bad attitudes. All of us here are guilty.

    I personally ask you to be aware of the absurdity of our status quo way of life at so many levels and practice relative sacrifice. I am doing this as best I can and I am trying to improve. Be aware of the impact of your actions and make an effort to do less. It is simple really but as difficult as an alcoholic turning down a drink. Do it for our future, do it for the poor, and do it for the earth. Your individual effort may not matter but it will matter to you. It is your personal preparation for a collapsing world. The sooner you get on board the more able you will be to endure privations.

    There will be consequences to mass actions of relative sacrifice and that will be lower economic velocity. If we choose to do less we are in effect creating just that sort of thing the central banks are so concerned about. That is an interesting catch 22 for those who want to do what is right but don’t want to see an economic depression. If we have a critical mass of people make an effort to lower carbon and conserves resources this will be deflationary.

    In this respect this way of life is not going to be promoted by the top. This will have to be a grass roots effort. Those involved need to realize these efforts if embraced by enough people will help pull the plug on the status quo. If you want the switch flip on the status quo then practice relative sacrifice and withdraw as much as possible from our current modern intensive consumer lifestyles.

  26. shortonoil on Sat, 30th Jan 2016 6:58 am 

    “if demand for oil need to produce oil was so large we wouldn’t have a glut.”

    Not necessarily; if the demand for oil to produce oil drove the demand from the general economy down more than it increased it, you could still have excess supply. That is, without identifying the relationship between the two sources of demand you know nothing about what is transpiring. It is possible that reducing production could actually increase the excess supply by reducing demand in the general economy more than the supply was reduced. That is not far fetched, it takes oil to power the economy.

  27. Boatm on Sun, 31st Jan 2016 7:29 am 

    short,
    Considering conventional oil is replacing fracked oil I can see your point. A couple thousand oil and gas frackers are now offline. The footprint of the FF industry is much lower. Yet production is high thus adding to the glut and the storage of more energy.

  28. Xannon on Sat, 1st Oct 2016 12:50 am 

    I should add that my mom hasn't discouraged us, it's just that she doesn't have an agenda for us to go into it and it woln#u&d039;t really help if she did. Honestly I really wonder about these supposed women who love science but are being told they'll never make it. That wouldn't have stopped any of the women I know. I'm trying to be a writer and I get way more opposition than I did when I told people I was going into biochemistry a few years back. That is despite the fact that most writers are women.

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