Credit: Arne Hueckelheim/Wikipedia

Oil could drop to $20 a barrel in 2016

Goldman Sachs predicts the oil slump could persist or even deepen next year as the market grapples with oversupply.

by Adam Gale
Last Updated: 21 Sep 2015

How low can oil go? After a year of rock-bottom prices, oil executives may have hoped that crude would stabilise next year, but that may be wishful thinking according to everyone’s favourite bearer of bad news, Goldman Sachs. Oil prices could bottom out as low as $20, its analysts have said, as oversupply persists.  

Now, that’s very much Goldman’s worst case scenario (or best case, depending on who you are). Its 2016 forecast is for Brent crude is to stay roughly where it is now, at $49.50 a barrel, though that’s well down from its earlier prediction that it would recover to $62.

‘The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,’ Goldman analysts said.

The oil price fell last year when US shale production exploded, which lifted American output to levels not seen since the early 1970s. OPEC then responded by refusing to cut supply to stabilise the price in an effort to drive the frackers out of business. Throw in the slowdown in China choking demand and you’ve got a perfect storm.   

The price of oil is cyclical, of course, as it is for all commodities. The persistently low price is already beginning to eat into high-cost US shale production, but of course it takes time for production to catch up to price. Drilling a new well may no longer be worth it at $49 a barrel, but once it’s drilled then it’s still worth pumping until it runs dry.

The US Energy Information Administration (EIA) said American production fell for the fifth consecutive week last week to 9.14 million barrels a day, and predicts it will average 8.8 million a day next year. That’s enough to make a difference, but apparently not enough to make up for the entry of Iran into the market, surging OPEC production and the slowdown in China.

Goldman Sachs expects the oversupply to end by the winter of next year, which will no doubt elicit groans in oil firm boardrooms across the world (well, it would if the executives didn’t already know).

Those executives may have some reason to hope that Goldman’s got it wrong on the price though. The EIA’s prediction for Brent from two days ago is still up at $59 a barrel next year. Much will no doubt depend on the extent of China’s slowdown, which may take some time to become clear.

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