6/29/2017 "How Did It Go So Wrong" Goldman Asks, As It Slashes Oil Price Target

Published on Zero Hedge (http://www.zerohedge.com)

Home > "How Did It Go So Wrong" Goldman Asks, As It Slashes Oil Price Target

"How Did It Go So Wrong" Goldman Asks, As

It Slashes Oil Price Target
By Tyler Durden
Created 06/28/2017 - 16:25

[1]
by Tyler Durden [1]
Jun 28, 2017 4:25 PM
[2] [3]

""Spot WTI oil prices at $43/bbl are now back to November pre-OPEC deal levels,
down from $52/bbl just a month ago and vs. our prior 3-mo $55/bbl forecast. How
did it go so wrong?

- Goldman Sachs

Goldman has done it again.

Shortly after Goldman's tech analyst came out with a bullish note on WTI, saying oil is now
"shifting focus back onto ~51.67-51.81. Keeping a stop at 43.32 (Jun. 22nd high)...." and
adding "daily oscillators are crossing upwards from the bottom of this recent range... this ultimately
opens up potential to eventually re-test the 200-dma/Dec. 16 downtrend up at 51.67-51.81.
Reaching these pivots would still maintain the trend of lower/lows and lower highs that has been in
place since January...."

http://www.zerohedge.com/print/598859 1/5
6/29/2017 "How Did It Go So Wrong" Goldman Asks, As It Slashes Oil Price Target

[4]

... Goldman's commodity analyst, Damien Courvalin came out and in a note which contains the
infamous words "How did it go so wrong", cut Goldman's 3 month price target on WTI from $55.50
to $47.50 as "shale drilling ramp-up and large rebounds by Libya, Nigeria are expected to slow
2017 stock draws" crushing Goldman's man near-term bullish thesis. Courvalin also notes that
prices will trade near $45/bbl until U.S. horizontal rig count lowers, stock draws increase or OPEC
makes additional output cuts Goldman's suggestion is that to normalize inventories, OPEC should
cut more than what Libya, Nigeria adding.

"We have yet to see if the U.S., service sector can convert this unprecedented increase in drilling
into production"

And while Goldman cut its near -term price target, it keeps its long-term WTI price anchor at
$50/bbl on ongoing shale productivity gains and cost deflation elsewhere. At least until that too is
cut in the not too distant future.

Here are the key sections from Courvalin's note:

Spot WTI oil prices at $43/bbl are now back to November pre-OPEC deal
levels, down from $52/bbl just a month ago and vs. our prior 3-mo $55/bbl
forecast. How did it go so wrong? The surprise over the past month was that two
large US stock builds and the unexpected ramp-up in Libya and Nigeria reduced the
confidence that inventories would normalize before the end of the OPEC deal.
Concurrently, the steady increase in the US rig count and the six month drilling to
production lag now imply that US production will be growing strongly by the end of
the OPEC deal. This threatens to close the window of time for stocks to normalize
before the OPEC cuts end and raises the concerns that OPEC will then ramp up
production to defend market share.

http://www.zerohedge.com/print/598859 2/5
6/29/2017 "How Did It Go So Wrong" Goldman Asks, As It Slashes Oil Price Target

No longer being able to dissociate between the 2017 draws and the concerns of a
surplus in 2018, Dec-17 oil prices could no longer act as the anchor and pivot for
the forward curve and left the whole curve to return into contango. In fact, trading of
the distinct 2017 vs. 2018 balances through long Dec-17 vs. short Dec-18
timespread positions likely precipitated this unraveling by offering producers too
strong a price signal to ramp-up production this year.

[5]

Despite the market losing its pivot point, the other relative moves in oil prices during
the recent sell-off have remained consistent with our fundamental framework:

The threats of a surplus next year precipitated the decline of the 1-n year forward
price to $45/bbl, which we discussed last month had to occur (albeit in our view only
gradually), to slow the shale rebound

The still ongoing draws have driven near-dated timespreads stronger over the past
month, with no visible impact yet of the Libya/Nigeria recovery

[6]

The new anchor is likely to be the price at which shale activity slows

http://www.zerohedge.com/print/598859 3/5
6/29/2017 "How Did It Go So Wrong" Goldman Asks, As It Slashes Oil Price Target

The oil market is back to searching for an anchor and we believe that this will likely
be for now the price at which shale activity slows. Until a month ago, the greater
than seasonal March-May draws and the upcoming May OPEC meeting had helped
rationalize the steady ramp up in US activity. Data since then has however shaken
confidence that these draws were real and sustainable and the market must now
address the shale response. Shales velocity is making it the marginal barrel today,
pushing the burden of proof on determining once again at what price oil horizontal
drilling activity will decline.

Where does this leave us? We believe that prices have reached a level near
$45/bbl at which US producers should start to adjust their drilling activity. Further,
strengthening near-dated timespreads suggest that the draws we expect have yet to
unravel. The threat of Libya/Nigeria production, the uncertainty on when and at
what price level shale activity will slow and the shrinking window of time for the
draws to normalize inventories before OPEC is tempted to ramp up all leave us
cautious of calling for a sharp bounce in prices here.

And the summary:

The fast ramp-up in shale drilling and the unexpectedly n large rebound in Libya/Nigeria
production are on track to slow the 2017 stock draws. This creates risks that the normalization
in inventories will not be achieved by the time the OPEC cut ends next March. We expect this
will leave prices trading near $45/bbl until there is evidence of (1) a decline in the US
horizontal oil rig count, (2) sustained stock draws or (3) additional OPEC production cuts.
Given that the market is now out of patience for large stock draws and increasingly concerned
about next years balances, we believe that price upside will need to be front-end driven,
coming from observable near-term physical tightness.
Cyclically, we believe that the balance of risks is nonetheless shifting from the downside to the
upside: (1) global inventories are still drawing and we continue to forecast a deficit this year,
(2) net long positioning is back to its February 2016 low level, (3) production disruptions are at
their lowest levels in 5 years and skewed to the upside, (4) OPEC can (and in our view
should) act and cut more than what Libya/Nigeria are adding, (5) our demand forecast
remains above consensus expectations, and finally (6) we have yet to see if the US service
sector can convert this unprecedented increase in drilling into production and what inflationary
pressures this will create. As a result, while we are lowering our 3-mo WTI forecast to
$47.50/bbl from $55/bbl previously, it remains above the forward curve.
Structurally, however, ongoing productivity gains for shale and cost deflation elsewhere
corroborate our $50/bbl long-term WTI price anchor. While this leaves risk to our 2018-19
$55/bbl forecast squarely skewed to the downside, the shale breakeven discovery process is
still a work in progress given the opposing forces of productivity gains, cost inflation and the
dynamic cost structure of shale.

And the punchline of the whole report:

This leaves us cyclically bullish within a structurally bearish framework: the

near-term price risks are now increasingly skewed to the upside while the low
velocity deflationary forces of the New Oil Order are still at play.
http://www.zerohedge.com/print/598859 4/5
6/29/2017 "How Did It Go So Wrong" Goldman Asks, As It Slashes Oil Price Target

Good luck figuring out what that means.

Business Cartels Chronology of world oil market events Commodity markets Contango
Energy crisis goldman sachs Goldman Sachs Market Share OPEC OPEC
Organization of Petroleum-Exporting Countries Petroleum Petroleum industry Petroleum
politics Price of oil Primary sector of the economy recovery World oil market chronology
from

Source URL: http://www.zerohedge.com/news/2017-06-28/how-did-it-go-so-wrong-goldman-asks-it-slashes-oil-price-

target

Links:
[1] http://www.zerohedge.com/users/tyler-durden
[2] http://www.zerohedge.com/printmail/598859
[3] http://www.zerohedge.com/print/598859
[4] http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/25/wti.jpg
[5] http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/25/courva%201.jpg
[6] http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/25/courva%202.jpg

http://www.zerohedge.com/print/598859 5/5