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Goldman Sachs estimates near-term WTI prices could fall to $40 per barrel

Oil prices could give back gains seen over the past few weeks, falling as low as $40 per barrel, according to Goldman Sachs. West Texas Intermediate (WTI) oil prices rose more than 20% between January and February due to supply disruptions in the Middle East, strong winter demand and high refinery margins, reports Reuters, but Goldman says that “the activity pull is sequentially weakening.”

The bank expects that decreased demand from OECD-Asia and record builds in crude inventories in the United States will put continued pressure on the price of WTI. Goldman expects “OECD-Asia demand to decline in 2015 as stronger industrial production is offset by the continued switch to LNG (liquid natural gas) for power generation and the impending start-up of the two Sendai nuclear reactors in Japan.”

Compounding the pressure from competitive LNG pricing, the EIA reported a massive build in crude inventories last week to add to the already record levels in the U.S. Last week’s 10.3 million barrel addition to crude inventories increased what is already believed to be the highest levels on record.

“While we continue to forecast strong demand recovery in 2015, we believe that sequentially weaker activity, the end of winter and the end of potential restocking demand will lead to a sequential deceleration in demand-growth as we enter the spring,” said Goldman Sachs. These factors could push the price of WTI down to $40/bbl, according to the bank.

Goldman said that Brent crude prices could also face pressure as Asian markets turn to LNG and OPEC brings more production online. “Absent further unexpected OPEC disruptions, we expect Brent oil prices and timespreads to reverse their recent strength,” Goldman said. The note went on to say that, “the lack of a meaningful build in the past few months leaves risk to our forecast for WTI oil prices remaining at $40/bbl for two quarters skewed to the upside.”

Hedge funds losing faith in oil

News last week of the record build in U.S. crude inventories has also prompted many hedge funds to start cutting bets on rising oil prices. Speculators pared their net-long positions in WTI by 19% in the week ended March 3, the fastest pace since December 2012, reports BNN.

“The supply builds are astounding and we’re going to run out of places to put the stuff,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “Ultimately something has got to give and the CFTC (Commodity Futures Trading Commission) shows people are positioning for a collapse of the front contract.”

Net-long positions for WTI dropped by 38,299 to 164,310 futures and options in the week ended March 3, according to the CFTC, the lowest level since November. Short bets climbed 17% to 138,007 and long positions fell 5.6% to 302,317.

Bullish bets on gasoline climbed 2.7% to 42,312 contracts, the first gain in three weeks. Futures rose 20% to $1.9499 a gallon on NYMEX in the reporting period.

Bearish wagers on U.S. ultra-low-sulfur diesel decreased 27% to 11,084 contracts, the least since August. The fuel dropped 4.4% to $1.9395 a gallon in the report week.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.