The second week of 2016 was hardly more forgiving for the energy markets than the first, with WTI and Brent crude both falling by about 10% to finish the week under $30/bbl. We have not seen prices this low since early 2004, and are not far from their lowest levels since the start of the millennium.
The September 11th announcement by Goldman Sachs (N:GS) that oil could fall to $20/bbl was a major media headline and encouraged a large sell-off in the crude market. The lesson: when Goldman speaks, people listen. Our ears were therefore perked Friday morning when Jeff Currie, Goldman’s Head of Commodities Research, wrote that “the key theme for 2016 will be real fundamental adjustments that can re-balance markets to create the birth of a new bull market.” Currie believes that a large portion of U.S. shale production is on its deathbed, and predicts that U.S. production will decrease by 575,000 bbl/day by the end of the year. A fall that significant would, believe it or not, flip the market from oversupplied to undersupplied. Goldman’s conclusion: crude will enter a bull market by “late 2016.” Readers of this newsletter will know that we have been watching U.S. production closely over the last year, and highlighted this statistic as the one to watch in 2016; Goldman’s analysis reconfirms our belief that American supply is the most important number in energy right now.
In the political realm, the world awaits the lifting of economic sanctions on Iran, which could happen as soon as next week. Although the OPEC member promised a 500,000 bbl/day increase in the moment sanctions were lifted with an additional 500,000 bbl/day coming online after one year, a recent Bloomberg survey estimates that actual production increases would be significantly lower. In fact, the median forecast is that they will reach roughly half of their production goals, with analysts pointing to severe under-investment as a major roadblock in Tehran’s plans.
Diesel in U.S. dollars ended the week under $1/gal, while prices in Canadian dollars fell about 3 cents/L to finish around $0.3650/L. The market is nearly 40 cents below last year’s high, as is below the lowest prices we saw during the 2008 Financial Crisis.
