Nassim Taleb warned us to treat forecasts with a bag of salt. Even – or especially – from the likes of Wall Street investment house Goldman Sachs which in 2008 warned of the oil price at $200 a barrel. Now the same firm is projecting a price below $80. Christopher Johnson energy community editor at Thomson Reuters explains why slashing the oil price estimate is simply recognising the new reality in global oil markets which is based on a structural oversupply of black gold from North American shale oil. – CP
GUGULETHU MFUPHI: Goldman Sachs has forecast that Brent crude oil could drop to the price of around $70.00 a barrel next year, as it slashed its oil price estimates due to a global supply glut. Joining us now, on the line, from London is Christopher Johnson; he’s the Energy Community Editor at Thomson Reuters, good to have you with us today Chris. Let’s unpack your analysis of Goldman Sachs and their expectations. The cut in the forecast regarding the oil price, is this something you agree with?
CHRISTOPHER JOHNSON: Well, I think many people in the market do agree with it. Essentially, what Goldman Sachs is doing is recognising that there’s been a fundamental shift over the last year or so, over the supply-on-demand picture in the oil market, and the oil market at the moment does look structurally over supplied. Goldman Sachs has made a big move. They’ve cut prices, until the first quarter of next year, by $15.00 a barrel. That’s a colossal move and it is well over ten-percent down from where they were, and they are, of course, now, I think the most bearish of all the big institutions but they’re not alone. Barclays this morning has just cut as well and many of the other banks have done the same, over the last few weeks.
Essentially, what they are doing is recognising the new realities of oil and that is overwhelmingly mainly, dominated by North American shale oil, which is just pumping so much oil into the market that there’s plenty of spare.
ALEC HOGG: Christopher, we know all about shale because one of our big companies in South Africa has become the biggest foreign investor into the United States, through its investment there, but I wonder how seriously we should be taking people like Goldman Sachs’ oil forecast. 7th March 2008, Goldman Sachs said ‘oil might reach $200.00 barrel’. Now they say that it is going to maybe, go below $80.00. Do they really know what they’re talking about, these guys?
CHRISTOPHER JOHNSON: Well that is really not for me to judge, I’m sure you’re in a better place to make those sort of calls, but I think that, yes, it’s possible that there’s a bit of a marketing element in here. Certainly if you have an outlier of a call that will get well reported that $200.00 a barrel; I remember myself and we, I think everyone took it seriously. I think we were even talking on CNBC about it. I don’t think that that is what is primarily motivating this. I think we have to give Goldman Sachs credit for good faith in this. They think that the market is over, supplied and there’s a possibility of a further dip. I think we have to take that really on face value. I mean, there’s been plenty of good arguments that gives that, so I wouldn’t want to suggest them being foolish in this.
ALEC HOGG: Or whether they are actually just doing it for marketing reasons. Shale gas deposits, all over the world, including here in South Africa. We do know that the United States has a head start in everybody else but being an energy expert, as these other shale deposits come on stream, then perhaps $80.00 itself might be even looking a little optimistic.
CHRISTOPHER JOHNSON: Well, that is certainly a possibility. Where the bottom of the market eventually turns out to be is really anyone’s guess. One of the best respected of the analysts here in London, Energy Aspects, in the last 24 hours have suggested that although supply may moderate and the balance may tighten a little, as we go to the next few months -suggesting that prices may have to come down quite a long way, quite a lot further, before they find a floor. On the other hand, one of the better more experienced analysts working for one of the big brokers here in London, PVM. He suggested this morning that possibly the prices are bottoming out. They point out that even though there have been cuts in the bank forecast over the last few weeks. In fact, the forward curve for prices actually suggest that, in fact, the banks are actually being quite modest and once the prices come down another few Dollars that they may bounce back up again.
Some of the charts suggest that the moving averages are sluggish and that we might have a break back up again. I like to say that none of us do have crystal balls and we have absolutely no idea where this is going, but certainly, at the moment the market is very, well supplied. If you are looking for oil, you can find it and as long as that’s the case, prices are not going to be rising very sharply.
ALEC HOGG: My view on all of this, Gugu, is that Nassim Taleb got it right. He said if you were to take the forecasts that people have made, people like Goldman Sachs today, and to analyse them you would never listen to their forecasts into the future because they get it wrong more then they get it right, but Christopher Johnson put some good perspective on that. He’s the Energy Community Editor at Thomson Reuters, remember our partners here, at CNBC Africa, the Thomson Reuter Group.
