Goldman Sachs Warns of Another Oil Glut in 2018

• Goldman Sachs Warns of Another Oil Glut in 2018

Leading global investment banking firm, Goldman Sachs, had warned that another downturn in global oil prices could come over the next three years, sparked by a new wave of supply stemming from mega projects that were planned years ago.

It stated that these projects cost billions of dollars and take many years to bring online, and that many of them were initiated back when oil prices traded at $100 per barrel.

“2017 to 2019 is likely to see the largest increase in mega projects production in history, as the record 2011-13 capex commitment yields fruit. This long-lead-time wave of projects and a short-cycle revival, led by United States shales, could create a material oversupply in 2018-19,” Goldman Sachs said in a note.

Reported by oilprice.com, Goldman identified a handful of projects in Brazil, Russia, Canada and the Gulf of Mexico that will reach completion and add to global supply between 2017 and 2019. It explained that combined with the new shale output, these projects could add another one million barrels per day next year to the global oil stock.

The investment bank also warned that the markets have become overly optimistic on oil prices since the Organisation of Petroleum Exporting Countries (OPEC) deal was announced nearly four months ago, adding that shale output could come in higher than expected this year, thus disappointing those expecting higher oil prices.

Similarly, reports indicate most European integrated companies are using a working assumption for their budgets that oil prices will average $60 per barrel in 2017, with an upper end bound of $80 per barrel between 2018 and 2020, all of which are in sharp contrast to Goldman’s projections of oversupply for the next three years.

According to another research note shared by investment bank, Jefferies, OPEC’s market intervention which has reportedly taken about one million barrels per day of oil off the market has not succeeded in reversing a bearish trend for oil inventories.

While oil prices are heading down again on swelling United States crude oil inventories, with Brent dropping below $50 per barrel for the first time this year, Jefferies stated that: “OPEC’s market intervention has not yet resulted in significant visible inventory draw-downs, and the financial markets have lost patience.”

Also commenting on the development, Ole Hansen, Head of Commodity Strategy at Saxo Bank said: “OPEC has used up most of its arsenal of verbal weapons to support the market. One hundred per cent compliance by all is the only tool they have left, and on that account they are struggling.”

With the OPEC deal at its midway point in execution, experts indicate that focus was already shifting towards an extension of the cuts through the end of the year.