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Goldman Blames Weather For Stronger Oil Prices, Sees WTI Sliding Back To $40

As we noted over the weekend when we showed a simple contango math calculation by SocGen according to which storage costs imply another 20% drop in Brent prices, now none other than Goldman - which has been oddly bearish on oil over the past few weeks - says that its Brent forecast remains at $40/bbl for two simple reasons: i) the global inventory glut is set to resume and ii) it's the weather's fault there has been a slowdown in the crude build-up.

From Goldman's Damien Courvalin:

Clear skies after a perfect storm?

 

The global build in crude inventories has stalled: OPEC disruptions have returned, demand has been strong, refining margins are stellar and product markets are backwardated. And while the build in US inventories has surprised to the upside, E&Ps are exhibiting a faster focus on financial discipline than we had expected. Net, the past month has featured a reversal of the late 2014 perfect storm of bearish catalysts: weak demand, low disruptions and profligate spending. And while this reversal is consistent with a rational and efficient market response to the collapse in oil prices, the contribution of weather and the premature rally keep us expecting that prices will remain below the current forward curve in 2015.

 

Rather, a sunny spell soon to end

 

Weather has played a great part in keeping crude off the market, disrupting Iraqi exports (sandstorms) with cold weather in the US and drought in Brazil supporting demand. And while we reiterate our out-of-consensus view that demand growth will be strong in 2015, on the back of better economic growth and low oil prices, we did not expect demand to be so strong this soon with recent leading economic indicators suggesting that the activity pull is sequentially weakening. Our expectation going forward is therefore for the global crude inventory build to resume. As a result and absent further unexpected OPEC disruptions, we expect Brent oil prices and timespreads to reverse their recent strength although the lack of a meaningful build in the past few months leaves risk to our forecast for oil prices remaining at $40/bbl for two quarters skewed to the upside.

Goldman's longer-term, 2015-2016 forecast: "still overcast"

While E&Ps’ focus on financial discipline has occurred faster than we expected, US producers are already preparing to ramp up activity later this year by successfully raising equity, reducing debt and building an uncompleted well war chest. Coupled with the large availability of external capital, this leaves risk to our $65/bbl 2016 forecast skewed to the downside as these assets will quickly be redeployed in a lower cost environment. Net, we reiterate our view that prices need to decline relative to the current forward curve, on a resumption of the crude stock build and on our expectation that low prices are required in order for the capex and rig cuts to materialize into sustainably lower production growth.

As usual, the only question is whether Goldman is actively loading up on oil as it is telling its clients to position for weaker oil in the months ahead.