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GOLDMAN SACHS: Don't believe the hype, oil is staying below $40

The oil market has been on a tear for the past week.

The WTI price, a benchmark for oil, is back above $33 a barrel after touching lows below $28.

The market is speculating over whether the OPEC nations, which control most of the world’s oil, are planning on an output cut.

It was enough for Russia’s biggest oil producer to call the huge rally in oil “idiotic” on Jan. 29.

Speaking to the Financial Times, Mikhail Leontyev, a spokesman for the state-owned Rosneft said (emphasis ours):

“Everything is possible in theory. It was possible a year ago, a month ago. Nothing new has happened. This frenzy is idiotic. It stems from the fact that people can’t read.”

“Consultations with Opec happen all the time. All positions are well known, they have not changed in any way,” he added.

This also happens to be the view of the oil analysts at Goldman Sachs.

The rally in oil prices will be short-lived, the investment bank said in a research note by a team led by Damien Courvalin, and will fade once the market realises OPEC has no intention of cutting output yet.

One of the aims of Saudi Arabia’s and OPEC’s strategy is to knock out the US shale oil industry. By flooding the world with oil, and reducing its price, OPEC seems to hope shale oil producers will become unprofitable. A cut now would ease pressure on non-OPEC oil producers.

Here’s Goldman Sachs, emphasis ours:

Despite the sharp bounce in oil prices that these headlines generated, we do not expect such a cut will occur unless global growth weakens sharply from current levels, which is not our economists’ forecast. This view is anchored by our belief that such a cut would be self-defeating given the short-cycle of shale production and the only nascent non-OPEC supply response to OPEC’s November 2014 decision to maximise long-term revenues.

Here’s the huge rally in oil in the past week:

Oil Feb1Investing

While it looks as if oil might be rising to hit the $50 or $60 a barrel mark cited by energy company execs as the natural price for the commodity in the next few years, Goldman Sachs disagrees:

We believe this inflection phase requires oil prices to remain between $40/bbl (financial stress) and $20/bbl (operational stress) until 2H16. This phase will be characterised by a highly volatile and trend-less market with the price lows likely still to be set.

The era of exceptionally cheap oil has further to run, and OPEC will want to see some real pain in the US shale industry before letting the price rise again.

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