Is The New Oil Order Still Too Sweet?

• Oil prices hit new multi-year lows last week following the OPEC meeting.
• Short covering and long positioning in the oil market ahead of the meeting set up the market for a Post-meeting selloff.
• In the near-term, Goldman Sachs sees risk that oil prices could drop to cash cost of around $20/bbl.

Last week, WTI crude oil priced fell to new multi-year lows in the aftermath of the OPEC meeting in which the organization decided to maintain its strategy of flooding global markets with crude oil. In the wake of OPEC’s decision, Goldman Sachs analyst Damien Courvalin now believes that the global oversupply of oil will not begin to subside until Q4 of 2016.

Oil Short Reloaded

According to Courvalin, the most recent plunge in oil prices was partially driven by the market’s relatively bullish positioning on oil prior to the OPEC meeting. Hopes of a change in tone from the organization, however, were quickly dashed, and the flood of short selling in the market pushed crude prices to new lows.

“Although prices are now below our 3-mo $38/bbl WTI forecast, we still see high risks that prices may decline further, as storage continues to fill,” Courvalin explains.

Low Prices Are Ultimate Solution

In terms of the long-term outlook for oil prices, today’s low prices will ultimately bring about the elimination of the supply glut. Courvalin believes that $40 oil is a low enough price to continue to drive down U.S. production and eliminate the surplus by the end of 2016.

Things Could Get Worse Before Getting Better

In the short-term, risk to oil prices remains to the downside, with U.S. rig counts still too high, upside risk to OPEC production next year due to Iran and global storage capacity nearing its maximum load. In the sHort-term Goldman remains concerned that the oil industry may be approaching a period of “operational stress” that forces prices down to cash cost around $20/bbl.

The United States Oil Fund LP (ETF) USO is now down 52.0 percent in the past year.

Disclosure: the author holds no position in the stocks mentioned.