Glut Be Gone!
All of a sudden, in a major about face, Goldman Sachs (NYSE:GS) is now saying that the global oil market has gone back to a supply deficit for the first time in two years.
Goldman Sachs, one of the biggest oil bears on the street, is starting to see some of the things I have been writing about for the past few months.
Goldman says they are now forecasting $50.00 a barrel for crude oil by the latter half of this year, a far cry from the $10.00 a barrel crash price they warned about. They are starting to realize that the line between an oversupply and a deficit is a lot thinner than people think.
Soaring demand, in part caused by low prices and falling non-OPEC oil output, is sending oil back on an upward trajectory. This comes as the U.S. oil rig count plunges for the eighth week in a row and major oil players Saudi Arabia, Oman and Bahrain get downgraded by Moody’s.
Now if demand continues to hang in there and the global economy has no shocks, we will be on a new bull cycle and start to cut into global oil inventories.
"The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected. The market likely shifted into deficit in May, driven by both sustained strong demand as well as sharply declining production," Goldman Sachs said, flipping the market from a 2 million bpd in 2015 supply overhang to a deficit of over 400 million bpd by the fourth quarter this year.
Reuters laid out the reasons why Goldman had to change its call. They point to Nigeria, where oil production has fallen to a 20-year low to 1.65 million bpd following several acts of sabotage. Venezuela seemed on the brink of meltdown, triggering fears of default by its national oil company PDVSA, which has to make almost $5 billion in bond payments this year. Venezuela's oil production has already fallen by at least 188,000 bpd this year.
In the United States, crude oil production has fallen to 8.8 million bpd, 8.4 percent below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 percent to 4.04 million bpd in April, year-on-year.
Of course, as pointed out by The International Energy Agency, some of this has been made up by OPEC as they pumped 32.44 million bpd in April, up 188,000 bpd from March, the highest since at least 2008.
Yet OPEC has problems of their own. Moody’s Investors Service downgraded Saudi Arabia, Oman and Bahrain. Saudi Arabia’s long-term issuer ratings was lowered by a notch to A1 from Aa3 but maintained its stable outlook. Oman’s credit rating was reduced by a notch to Baa1 and Bahrain was cut to Ba2.
Moody’s acted as Saudi Arabia’s deficit hit $100 billion in 2015 and saw its foreign reserves fall to $155 billion from a peak in 2014 to below $600 billion in March, according to government data. It was reported by the Wall Street that Moody’s expects those foreign reserves to decline even further until 2019 to $460 billion.
It also estimates the Saudi budget deficit to average 9.5% of its gross domestic product each year between 2016 and 2020, a shortfall that will require $324 billion in financing.
“A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks,” said Moody’s.
The Wall Street Journal says that Saudi Arabia borrowed $10 billion from international banks last month and is widely expected to issue more debt later this year. But its strongest response so far to the new economic challenges is a raft of reforms announced last month, dubbed Vision 2030, aimed at reducing the country’s dependence on oil.
The economic overhaul involves listing part of state-owned energy giant Saudi Arabia Oil Co., known as Aramco, but also promoting non-oil industries and making the country more attractive to foreign investors.
Moody’s said that without any of those reforms, Saudi Arabia’s financial troubles would continue to intensify. It said the country’s efforts at diversifying its economy, even if only partially successful, would improve the country’s creditworthiness. At the same time, Moody’s said those plans are still at an embryonic stage and their “impact remains unclear.”
We continue to believe that the price drop in the beginning of 2016 set a chain of events that will have long-term implications for the energy industry. We are already starting to see that global spare production capacity is razor thin.
We are also seeing more contraction in energy spending, and it is unlikely that there is sufficient capital or appetite to bring back on shale rigs until the producers and the bankers are convinced that higher prices are here to stay.
The number of rigs for oil and natural gas in the U.S. fell by nine last weeks to 406, another all-time low.
We also see potential for natural gas as demand may rise and production fall. If we get a hot summer natural gas is a sleeper.