Crude oil trading outlook: futures hit new lows as Goldman cuts price forecasts

West Texas Intermediate and Brent crude slid from the lowest in more than 5-1/2 years as Goldman Sachs cut its price outlook for the year and signaled oil must become cheaper to force a curb of US shale investment, while Venezuela called on other OPEC members to work together on recovering the oil market.

US crude for delivery in February fell 2.17% to $47.31 per barrel by 8:09 GMT on Monday, having shifted between $48.19 and $47.14 during the day. The contract fell 0.88% on Friday to $48.36, the lowest settlement since April 2009.

Meanwhile on the ICE, Brent for settlement in the same month was down 2.49% to trade at $48.86 a barrel. Prices held in a daily range of $49.98-$48.59. The contract slid 1.67% on Friday to $50.11, also the lowest settlement since April 2009. Brent traded at a premium of $1.55 to its US counterpart, down from Fridays settlement at $1.75.

The market extended a rout as Goldman Sachs predicted a further slump in prices before US producers cut investments, which in turn will ease a supply glut, allowing the market to balance itself out.

“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in a report. “The search for a new equilibrium in oil markets continues.”

The bank said US crude will trade at $39 and $65 per barrel in six and twelve months, respectively, compared to previous projections for $75 and $80, while the outlook for Brent was slashed to $43 and $70 from $85 and $90 earlier. For the first quarter, WTI is projected at $41 and Brent at $42, the bank said.

Goldman also dropped its expectations that OPEC will address falling oil prices by cutting its own output and predicted that inventories will build up in the first half, estimating that sufficient storage capacity could hold a surplus of 1 million barrels per day for a year.

OPEC, which accounts for about 40% of global supply, reached a collective decision on November 27th to keep its production quota unchanged, ignoring smaller members appeals to lower output in order to cushion a steep price drop. According to a Bloomberg survey, the oil cartel pumped 30.24 million bpd of crude in December, lower than November but still exceeding its official target.

Major OPEC producers have underscored their determination to protect market share and pump at the same pace, attributing the global supply overhang to record-high US production, boosted by the US shale oil boom. US crude output surged to 9.14 million bpd in the week through December 12th, 2014, and has remained an inch below that level ever since.

Meanwhile, Venezuelan President Nicolas Maduro said that prices need to return to $100 a barrel for economic equilibrium. The groups 12 members need to reach a consensus to “converge at a common strategy to benefit the oil market and stabilize the global economy,” he said. Venezuela was reported to have agreed with leading producer Saudi Arabia to work to support oil prices “with state policies” between the two countries, without providing further details.

Saudi billionaire businessman Prince Alwaleed bin Talal said, however, that oil wont return to $100 levels again. “If supply stays where it is, and demand remains weak, you’d better believe it is going to go down more,” he said, quoted by Bloomberg.

Economic state

The state of the global economy is seen as the main driver of lower crude prices amid speculations that slowing economic activity would fail to soak rising supply. The market drew some support on Friday, but only to a limited extent, as the US Labor Department reported that US employers added 252 000 people to payrolls in December, an 11th straight month of job growth above 200 000, while the unemployment rate slid to a new pre-recession low of 5.6%.

However, persistent economic weakness in China and Europe continued to drag on prices. Data on Friday showed that consumer prices in China rose by an annualized 1.5% in December from 1.4% a month earlier, which was the lowest in five years. Producer deflation worsened, with the Producer Price Index tumbling by an annual rate of 3.3%, compared to projections for -3.1% and -2.7% in November. This was the worst reading since September 2012.

Painting a darker picture for Europe as well, German exports declined by 2.1% in November, exceeding a projected 0.2% drop, while industrial production contracted by 0.1%. Industrial output in France fell as well, by 0.3%, while in Spain it remained unchanged, underperforming analysts’ projections for 0.7% growth. The UK’s industrial sector also suffered a drop in activity, with industrial production sliding 0.1% on monthly basis and expanding by a lower-than-expected 1.1% year-on-year, but manufacturing production came in better than projected.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $48.38. In case the contract breaches the first resistance level at $49.59, it may rise to $50.83. Should the second key resistance be broken, the US benchmark may attempt to advance $52.04.

If the contract manages to breach the first key support at $47.14, it might come to test $45.93. With this second support broken, movement to the downside could continue to $44.69.

Meanwhile, February Brent’s central pivot point is projected at $50.15. The contract will see its first resistance level at $51.40. If breached, it may rise and test $52.69. In case the second key resistance is broken, the European crude benchmark may attempt to advance $53.94.

If Brent manages to penetrate the S1 level at $48.86, it could continue down to test $47.61. With the second support broken, downside movement may extend to $46.32 per barrel.