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Goldman Sachs: 4 Key Reasons Why Oil Prices Are Still Bearish
Aspire, Hot Picks | 23 September 2015
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By: Lim Si Jie
Articles (169) Profile

Oil’s outlook just keeps getting worse. Analysts at Goldman Sachs recently published a research note projecting dour projections for crude oil. For the past week, the ominous Goldman note tipped Brent Crude, and West Texas Intermediate (WTI) oil trading sharply lower on the New York Mercantile Exchange.

Goldman’s Worst Case Prediction for Oil: $20 Per Barrel

Goldman Sachs believe that the potential for oil prices to fall near $20 a barrel is “becoming greater as storage continues to fill”. Led by global commodities research head, Jeffrey Currie, Goldman believes that the global glut in crude supply is much higher than expected.

Goldman’s dire $20-a-barrel worst-case prediction targeted at Brent oil—the international benchmark—bodes ill for the US benchmark, WTI, which typically trades at levels lower than that of Brent. According to its research note, Goldman forecasts the global oil market to remain in a supply surplus until the fourth quarter of 2016.

4 Key Reasons for Bearish Oil Price

1.   Bearish Market Sentiments; Lower Price Forecasts

While supply is a fundamental reason for the fall in oil prices, market sentiments have further worsened the problem. Lower oil-price forecasts seem to have become the norm as the global glut of supplies persists. A week before Goldman’s forecast, the U.S. Energy Information Administration has also issued lower price forecasts on WTI and Brent for this year and 2016.

2.   Oil Supply Issue: OPEC Inaction

Despite increasing calls from oil producers, including Venezuela, OPEC has not announced any plans to hold an emergency meeting. The next scheduled meeting is set for December.

While Venezuela had asked the cartel to consider a coordination with non-OPEC Russia, Saudi Arabia, OPEC’s largest oil producer, has made it clear that it will not lower output as it fights for market share against the US shale producers. In recent years, the shale boom and increased production from the US has greatly reduced OPEC’s domination on world oil markets.

3.   Oil Supply Issue: Indonesia and Iran 

OPEC must also deal with the fact that more oil will be coming to the global market, which will further exacerbate the glut of supplies.

Indonesia’s oil production was estimated at around 930,000 barrels a day in 2013. Also note that Indonesia is looking to re-join OPEC as a member when the cartel meets again in December. According to Colin Cieszynski, chief market strategist at CMC Markets, gaining membership into OPEC could help Indonesia attract more investment.

Iranian production will be another issue for OPEC to contend with. Iran’s nuclear deal is making progress toward U.S. government approval. While there are some doubts about Iran’s ability to ramp up crude output, the oil market appears to expect that Iran will eventually add around one million barrels a day to the world market. 

4.   Oil Demand Issue: China Economy Concerns

Yes, it is no secret that China’s economy is slowing. Jitters over the direction of the global economy took steam out of crude’s rally in the last week. In particular, the world is concerned about economic growth in China. On Friday, Fed Chair Janet Yellen held off raising interest rates, citing heightened concerns about growth in China and other emerging market economies.

According to Chinese customs data, China’s crude-oil import in August has declined 13 percent year-over-year to 26.59 million tons, while exports of the same month last year has dropped 33 percent to 220,000 tons. The drop in the imports underscores the slowdown in the world’s second largest economy, which will further worsen the demand for crude oil.

Investor Takeaway: Make Use of Increasing Dividend Yields for Oil-Related Stocks

The continued fall in oil prices has led to the fall in share price of oil-related stocks. The fall in share price also meant an increase in dividend yield.

Investors can consider picking up oil-related stocks with possible dividend play such as Keppel Corp (Dividend yield: 6.71 percent), Sembcorp Marine (Dividend yield: 5.00 percent) and Sembcorp Industries (Dividend yield: 4.57 percent) with a dollar cost averaging method.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Keppel Corp  6.290 +0.07 +1.13%   
Business: [FY18 Turnover] Infrastructure (44.1%), offshore & marine (O&M) (31.4%), property (22.5%), investments (2%).

Insight: Apr-19, 1Q19 revenue rose 4.1% underpinned by high... Read More
Sembcorp Marine  1.310 +0.040 +3.15%   
Business: Co is a leading global marine & offshore engineering group. [FY18 Turnover] rigs & floaters, repairs & upgrades, offshore platforms (98.8%), ship chartering (1%), others activities (0.2%).

Insight: May-19, 1Q19 revenue fell 31.3% to $810.6m due to ... Read More
Sembcorp Industries  2.240 +0.01 +0.45%   
Business: Primarily engaged in the production and supply of utilities services. [FY18 Turnover] Utilities (55.9%), marine (41.8%), others/corp (2.2%), urban development (0.1%).

Insight: May-19, 1Q19 revenue fell 10.1% to $2.5b due to lo... Read More


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