Brent slips below $50 as Goldman’s slashes forecasts

Brent slips below $50 as Goldman’s slashes forecasts

By Craig Erlam on Jan 13, 2015 08:08:58 GMT

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The week ahead may not have as much to offer as the one just gone when it comes to hard-hitting economic events, but with oil prices already making some significant moves overnight it would take a brave person to bet against these high levels of market volatility continuing.

At times last week investors were starting to feel a little bit more bullish as oil prices began to stabilise around $50 a barrel for Brent crude, giving equities the opportunity to pare some of the losses that have come with the decline in oil prices. However, that was only to last a couple of days with Friday bringing more volatility as oil prices dipped below the psychologically important $50 level and the US released it’s widely followed jobs report which was seen as largely positive by the markets.

Brent may have recovered to close back above $50 at the end of the week but with prices opening lower overnight and now trading around $49.30, I think we’re going to see plenty more volatility in the coming days as pressure mounts on oil producers to scale back production before prices get dangerously low.

Many people view $40 to be the level at which some producers may start to seriously struggle and be forced into cutting production. While many US shale companies may be hedged against these low prices for now, they’re also quite heavily in debt and require prices to be much higher if they’re going to be able to maintain the current levels of output. OPEC is effectively banking on this and I don’t think we’re too far away from that now. Oil may not have bottomed out quite yet but I think some of the bigger players in the markets may be tempted to buy around the current levels.

That said, Goldman Sachs has released it’s latest forecasts for oil and they would suggest that oil is not quite cheap enough yet. The most surprising thing about the report, which may be weighing on oil prices today, is the length of time that they expect oil prices to remain so low for. A price target for Brent crude of $50.40 for the end of this year would suggest that Goldman’s doesn’t foresee many production cuts this year, which when you consider that prices are already below cost for so many producers as well as the debt levels of many US shale companies, is quite surprising.

With OPEC refusing to budge and risk losing market share, despite pressure mounting from some of the smaller oil producing countries, the big question is how much longer can US shale companies – which have high costs as the industry is still in its infancy – continue to pump at the current rate. This is largely dependent on how well hedged they are because many of them are quite heavily in debt and when these hedges stop protecting them, drilling will be forced to slow.

While oil is likely to continue to be a major driver in the markets this week, today also marks the unofficial start of US earnings season with Alcoa releasing fourth quarter results this evening. With the likes of JP Morgan, Goldman Sachs and Wells Fargo following this week, any stabilisation in oil prices may shift the focus to company earnings, especially with the week being so quiet on the economic data front.

The FTSE is expected to open 5 points higher, the CAC 11 points higher and the DAX 37 points higher.

About Craig Erlam

Craig Erlam is Market Analyst at Alpari UK. He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter, Google+ and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

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