19 December, AtoZForex.com, London – Crude oil prices fell below $35/bbl on Friday, pressured by data indicating an unexpected rise in US crude supplies and strength in the USD after the Fed’s decision to increase interest rates by 25bp on Wednesday. Nevertheless, Goldman Sachs warns that oil prices have not fallen low enough to induce production cuts in order to balance the market. Are crude oil prices to hit $20?
The US rig numbers and domestic oil company spending remain too high to ease the global crude glut. Moreover, the odds of hitting storage constraints by the early spring are rising, thus crude prices might have to fall to $20/bbl to force production cuts, Goldman Sachs says.
“Financial stress may prove too little too late to prevent the market from having to clear through ‘operational stress,’ with prices near cash costs to force production cuts, likely around $20 a barrel,” Goldman Sachs noted.
To add to the global glut, Goldman projects that Iranian oil production could increase beyond the 285,000 barrels per day, which could total the output from the Organization of Petroleum Exporting Countries (OPEC) above the 32m barrels per day next year. At the moment, oil production is 1.5/mbd more than the world demands, according to Goldman Sachs.
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Meanwhile, the rest of the larger crude oil producers forecast a stable output for the next year, and the majority do not even need to worry about banks reducing their credit stream, creating the risk that:
“if investor capital is available to accommodate producers’ funding needs, the slowdown in U.S. production will take place too late or not at all,” Goldman Sachs added.
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