The Brent oil price was weak overnight falling a little to $44.20 but amid a sharply lower US dollar that is pretty lousy. Goldman was out with more bearishness:
Our forecasts reflect our belief that “financial stress” can solve the current market imbalances, by gradually reducing excess supply capacity as demand recovers. We believe however, that there are high risks that this may prove too slow an adjustment as inventories continue to accumulate. This is particularly the case in the oil market where storage utilization is nearing historically elevated levels. The risk of markets adjusting through “operational stress”, when a surplus breaches logistical capacity such that supply can no longer remain above demand, rather than financial stress, is now much greater.
Mild winter weather over the coming months (a concerning risk given current El Niño conditions) could see weak heating demand in the US and Europe. If this materializes, it would likely be the trigger for adjustments through the physical market,pushing oil prices down to cash costs which we estimate are likely around $20/bbl(see New Oil Order: Too full for comfort, published October 25, 2015 for more details). As such a drop in spot prices to cash costs would force rapid adjustments, it would likely be followed by periods of stronger returns in both spot and roll returns, as historically has been the case (1986, 1988 and 1998).
