Americas News
Traders Nervous Over Inventory Builds Cause Friday Price Drop, but Goldman Thinks Fundamentals Are "Surprisingly Good"
Concern over U.S. shale production growth and the seemingly invincible global glut caused crude on Friday to drop below $50 - but Goldman Sachs Group Inc. says fundamental are improving and the selloff isn't justified.
Brent on Friday declined $1.03 to settle at $51.96, while West Texas Intermediate dropped $1.09 to settle at $49.62 per barrel, the lowest close since March 29.
Prices previously dropped on Wednesday when government data showed that despite stockpiles continuing to decline, U.S. production rose for a ninth straight week - suggesting to traders that the gains will at some point soon overtake the declines.
Michael Cohen, head of energy commodities research at Barclays Plc, said, "The drumbeat of bearish data continues to put pressure on the market; the bulls don't have much of a leg to stand on now."
But Damien Courvalin and Jeffrey Currie, analysts for Goldman Sachs, wrote in a new report that the pace of declines in U.S. crude inventories is encouraging, and an acceleration in draw downs is expected through the second quarter as demand grows.
They stated, "We view technicals rather than fundamentals as the driver of this move lower," and they reiterated the bank's sequentially higher second-quarter Brent price forecast of $59 per barrel.
The analysts added, "We find in fact that the U.S. inventory data since March has been surprisingly good: crude inventories have been tighter than seasonal through March and April, with main petroleum products drawing faster than seasonal since February."
They also believe gasoline demand is being understated, "with the more accurate ethanol implied demand metric pointing instead to resilient gasoline demand growth, while distillate demand remains strong."
The question is, in light of the Organization of the Petroleum Exporting Countries (OPEC) indicating that it will extend its production cutbacks to the end of 2017 in a bid to maintain prices, where does the market go from here?
As far as Patrick Pouyanne, CEO of Total, is concerned, downward, due to U.S. shale growth thwarting OPEC's efforts: he remarked during a conference in Paris, "The price may fall again ... U.S. producers who have recovered quickly, will regenerate an influx of supply by the end of the year and this could have a negative impact on the markets."
Predictably, the price forecasts are coming from all sides, and most of them are tepid, with Todd Horwitz, chief strategist of Bubba Trading, believing crude could drop into the low $40s, ("oil is well overvalued in my opinion at these levels, there's way too much supply and there's not really enough demand," he told Bloomberg television); and Mark Matthews, head of Asian research at Julius Bear, foreseeing oil trading at $45 to $55 over the next six months while acknowledging that profitable shale production is a major point of concern.
Earlier this year, Shawn Driscoll, manager of the T. Rowe Price New Era Find and who correctly predicted the 2014 big drop in prices, remarked that there's not much left to the 2017 rally and that "we think we're going to see [prices in the $30s] in 2018."
