Goldman Says Oil Won't Climb Much Farther Than $50, But This Plays Into Undesirable "Reverse Goldilocks" Scenario

Paul Hornsell, head of commodities research at Standard Chartered

Goldman Sachs this week in a commodities research note stated what many observers have long anticipated: that Canada's resumption of oil production and Nigeria negotiating with militants to end rebel attacks on its production facilities means the ability of prices to climb much further above its current $50 level will be severely compromised.

The Canadian wildfires and the Nigerian attacks caused a cumulative loss of 3.5 million barrels per day in May alone, according to Goldman.

The note stated, "In particular, we expect that the (deficit in the second half of 2016) will remain modest at current prices and that a return into surplus is likely in (the first quarter of 2017) before inventories normalize by end-2017."

It also pointed out that prices must hold between $45 and $50 per barrel for the time being in order for a supply deficit to occur in the second half of this year.

But Paul Hornsell, head of commodities research at Standard Chartered, says $50 oil poises several major problems, not the least of which is it being too low to lure fresh investors and too high to force more production offline.

In noting that signs point to U.S. shale production picking up again, Hornsell told Reuters, "It's 'reverse Goldilocks': it's not hot enough and it's not cold enough.

"If you're bearish, it's not low enough for the bears and it's not high enough for the bulls; ergo, ($50) is the one number you don't stick at."

Goldman Sach's outlook matches that of the International Energy Agency (IEA), which in its latest monthly report released earlier this week says oil prices won't rise much higher than current levels as supply and past inventories remain high, but that the global market is nearing re-balance.