Goldman Sachs is not always right


  • Business
  • Saturday, 19 Sep 2015

Photo by bloomberg

THE headline figure on Goldman Sachs’ prediction of where oil prices are headed is certainly eye-catching. The US-based investment bank predicts a long-term forecast of oil at US$50 per barrel with immediate concerns of it dropping to as low as US$20 next month or in March next year when refineries shut down for maintenance.

It’s unfathomable how Malaysia – a net exporter of oil and gas (O&G) – would be impacted should the price of crude drop to US$20 per barrel. Based on the present fundamentals of the economy, where the O&G and commodities sectors contribute 18% of the nation’s total domestic production, the end result is negative.

But there are doubts whether Goldman Sachs’ prediction is accurate, especially when it comes to crude oil. This comes as there is a divergent view from the Organisation of the Petroleum Exporting Countries (Opec) that has a bullish view on crude.

Goldman Sachs is well-known for its prediction in the first half of 2008 that oil would possibly reach US$200 per barrel.

A report in May that year quoted the investment bank as forecasting the average to be US$141 per barrel in the second half of 2008 and US$148 in 2009 due to supply constraints.

What happened in the second half of 2008 was well-documented. The US was hit by a financial crisis due to the sub-prime loans problem, causing the banking system to run out of liquidity.

Oil prices crashed to less than US$50 per barrel.

Reports later surfaced that while the research units of several investment banks painted a rosy picture of the future price of oil, the proprietary trading units were “shorting” their position in the oil futures market.

“Shorting” activities essentially mean that the investment banks were clearing their positions in the trading of crude oil instruments. The investors caught by the sharp fall in oil prices are those who had believed the prediction of crude hitting US$200 per barrel.

Fast forward to the present scenario and Goldman Sachs has painted a rather sober picture of the price of crude in the next few years.

Its argument is validated by US O&G industry executives, who say that the global price for crude would be lower had the US government lifted the ban on exports of crude from that country.

There are two other factors that add credence to Goldman Sachs’ argument of a low crude oil price environment going forward.

When sanctions on Iran are finally lifted, there would be additional supply hitting the global crude oil market. If demand from China and other emerging markets does not pick up, the additional supply from Iran would dampen prices.

The second factor is the improving technology in the United States to bring down the operating cost of the shale industry. O&G from shale producers is the single one factor that has caused the United States to be a major producer of the energy.

According to former Petroliam Nasional Bhd president and chief executive officer Tan Sri Shamsul Azhar Abbas, the shale industry has technologies to bring down cost to less than US$30 per barrel, but they have not been commercialised yet.

But Opec, led by Saudi Arabia, has a different view and it is supported by the findings of the International Energy Agency (IEA).

On the supply side, Opec expects supply from the United States to slow down considerably next year, largely due to the impact that the lower oil prices have had on the shale industry.

Opec expects the production from the shale industry to grow by only 50,000 barrels per day (bpd) next year, down from 450,000 bpd expected earlier.

Opec, non-Opec and the United States are expected to slow down in their production next year.

The overall production from Opec for next year is expected to be about 30 million bpd, about one million more than this year. As for the United States, total production is expected to be at 14 million bpd next year, up marginally from 13.8 million bpd this year.

The non-Opec countries are expected to produce 57.6 million bpd, an increase of 160,000 bpd next year. This is a significantly lower growth of 880,000 bpd target to be achieved for the whole of 2015, with total supply at 57.4 million bpd.

On the demand side, Opec expects consumption to grow by about 1.5 million bpd to 92.8 million bpd compared with a growth in demand of 84,000 bpd earlier.

But what is more interesting is a report that stated that the “net long positions” of futures oil contracts held by investors jumped by almost 28,000 to 168,458 contracts in the first week of September, which is the highest in a month.

What this means is that the “smart money” or savvy investors are taking a view that oil prices will increase. This fits in well with the analysis of IEA and Opec.

Between the two oil agencies and Goldman Sachs, I would go with the argument of Opec and IEA, which points to a limited downside for oil prices.

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