Goldman Sachs energy analysts Arjun Murti on the equities side and Jeff Currie on commodities have just presented their thoughts for the market in 2009 — a follow up to their outlook published earlier last month.
The conclusion?
As stated before here, they see the market bottoming just as soon as non-Opec production begins to be reined in and the glut of supply on the front end begins to expire. According to today’s conference call they see this starting to happen around the second quarter, with a return to a bull market coming through in Q3 and Q4.
Until then their view is prices could fall further — as low as $30 per barrel in February — rebounding eventually in Q2 to about $37 per barrel.
Driving the collapse to $30 will be the exhaustion of all storage options, a situation the market is heading to quickly.
While floating storage is still an alternative, eventually harbour spaces will run out. According to the team it is unlikely the contango will compensate for storing crude on floating vessels not docked at harbour as this is substantially more expensive due to the cost of fuel for the ships. The Cushing issue (as explained here) also means that floating storage will not be able to compensate for anyone hoping to deliver WTI.
As a side note it’s worth noting that the depression of WTI prices versus other US crude differentials also continues as the following Platts data confirms:
US DOMESTIC, DELIVERED US GULF and LATIN AMERICA spot assessments:
WTI (FEB) 42.63-42.67 P-PLUS WTI -1.95/-1.93
WTI (MAR) 47.38-47.44 P-5 WTI 39.21
WTI (APR) 50.06-50.10 WTI-DELTA -5.36/-5.28
MARS (FEB) 40.74-40.81 Mars/WTI (FEB) -1.88/-1.87
MARS (MAR) 43.75-43.82 Mars/WTI (MAR) -3.63/-3.62
MARS (APR) 46.33-46.38 Mars/WTI (APR) -3.73/-3.72
spread vs 1st line WTI
WTI(MID) 42.34-42.40 -0.29/-0.27
WTS 41.16-41.24 -1.47/-1.43
EUGENE 42.11-42.19 -0.52/-0.48
BONITO 42.11-42.19 -0.52/-0.48
SGC 39.91-39.99 -2.72/-2.68
POSEIDON 40.65-40.75 -1.98/-1.92
LLS 46.93-47.02 4.30/4.35
HLS 43.16-43.24 0.53/0.57
WYO SWT 35.66-35.74 -6.97/-6.93
Thunder Horse 42.71-42.79 0.08/0.12
Other interesting observations include Goldman’s expectation that we will continue to see Dubai and heavy sour crudes strengthen against light sweet crudes as Opec increasingly abides by its promised production cuts. Accordingly, non-Opec production will have no choice but to shut in soon enough to compete and as Dubai strength filters through to the rest of the complex. The non-Opec shut-ins will also have to be substantial. All in all they estimate total spare capacity by the end of 2009 at some 3.6 mn barrels per day. Although, unlike Opec shut-ins, non-Opec production cuts are likely to be more permanent in nature because of how much harder it is to revive wells in deteriorating fields, which are more common in those areas.
The above means that looking further ahead, if anything, there will be more risk to the upside on prices than to the downside. Furthermore, both Murti and Currie believe that when the bull market returns it will do so quickly and sharply.
As strength in Dubai is likely to remain until Opec cuts are reversed, their top trading recommendation is being long August residual fuel oil cracks — that’s because fuel oil is likely to strengthen alongside sour heavy crudes which are more suited to its production.
Meanwhile, the contango is currently disincentivizing institutional investors because of the cost to roll positions, meaning most new money into the asset class is coming from retail investors via ETFs say Goldman. Note the current shape of the curve below:
Until the curve flattens, this is unlikely to change much.
On the industry front, they do not expect the average marginal cost of production to fall much below $80 per barrel, while Capex is likley to fall about 15 per cent internationally this year.
Related links:
It’s all about Cushing - FT Alphaville
Profiting from a contango, not so easy - FT Alphaville
Record inventories at Cushing - FT Alphaville
