Goldman sees oil dropping as price rally makes crude too costly

BEN SHARPLES

MELBOURNE, Australia (Bloomberg) -- Oil prices are set to slide as their rally to the highest level this year threatens to prolong a global glut, according to Goldman Sachs Group Inc.

Crude is now expensive relative to current and forecast fundamentals, analysts including Jeffrey Currie said in an e-mailed report dated May 11. Rising fuel inventories in the U.S. will erode refining margins and weigh on prices, while the reduction in drill rigs is not big enough to lead to persistently lower production, according to the bank.

Oil has rebounded 36% from a six-year low in March amid speculation a drop in U.S. drilling rigs to the fewest since September 2010 will slow output and ease a supply glut. West Texas Intermediate futures settling above $60/bbl will eventually lead producers to increase activity and cut their well backlog, Goldman said.

“While low prices precipitated the market rebalancing, we view the recent rally as premature,” the Goldman analysts wrote.

WTI climbed to as high as $62.58/bbl last week on the New York Mercantile Exchange, and traded at $59.72 at 4:46 p.m. Singapore time. Prices advanced 25% in April, the most since May 2009.

Crude inventories will fall only gradually in 2016 as an increase in output from low-cost producers such as Saudi Arabia and Iraq offset growth in demand, Goldman said. U.S. stockpiles are near the highest level since since 1930, according to monthly data from the Energy Information Administration dating back to 1920.

Market Oversupply

Benchmark crude fell almost 50% last year as a shale boom drove U.S. production to the highest level in more than three decades while Saudi Arabia and other members of the Organization of Petroleum Exporting Countries chose to protect market share over cutting output to boost prices.

The plunge in prices led to the steepest and most prolonged retreat in drilling from U.S. fields on record. Output from shale formations such as North Dakota’s Bakken and Texas’s Eagle Ford shale will slide 54,227 bpd this month, based on Energy Information Administration estimates. It’ll fall another 86,000 bbl in June to a five-month low of 5.56 million, the agency said Monday.

“The oil market focus has dramatically shifted over the past month, from fearing a breach of U.S. crude oil storage capacity to reflecting a well under way oil market rebalancing,” the Goldman analysts said in the report. “We view this shift in sentiment and positioning as excessive relative to still weak fundamentals.”

Goldman predicts the global oil market will be oversupplied by 1.9 MMbopd in the second quarter of 2015.