Goldman Sachs lowers oil price forecast

Goldman Sachs have lowered their outlook for oil prices over the next couple years, predicting that OPEC will lose influence over the oil market due to the US shale boom.

We are lowering our oil price forecast to reflect the required slowdown in  US production growth: our WTI crude oil forecast is $75/bbl for 1Q15 and  2H15 (from $90/bbl previously). Given our unchanged WTI-Brent spread  forecast of $10/bbl, our Brent forecast is now $85/bbl ($100/bbl previously).  Our forecast path reflects our expectation that timespreads will be weakest  in 2Q15 when the global oversupply will be largest with Brent prices  reaching $80/bbl and WTI prices $70/bbl. In 2016 we expect stabilizing  fundamentals with moderate cuts to OPEC production once a slowdown in  US production growth is apparent. Our 2016 and long-term forecasts are  now $80/bbl WTI, $90/bbl Brent.

They note that uncertainty around the required price to  slow down US shale production growth is a key risk to their price forecast. According to the bank WTI prices will need to decline to $75/bbl to see a slowdown in US output growth.

Marcellus Shale Gas Drilling Tower 4

The bank also notes the loss of pricing power from key OPEC producers.

Accordingly, our forecast also reflects the realization of a loss of pricing power by core-OPEC. Consistent with the  economics of the “dominant firm/competitive fringe” market structure and  shale production exceeding OPEC spare capacity, pricing dynamics in the  oil market have moved away from the dominant firm’s production decision and towards the marginal cost of US shale oil production.

Whether OPEC and Saudi Arabia in particular will be able to restore that power or not the Saudi’s appear to have little incentive to do much now and maybe for some considerable time. According to Deutsche Bank, the Saudi government can sustain itself for almost 8 years with Brent crude at $83/bbl. The government has accumulated sufficient “rainy day funds” to withstand a prolonged period of budget deficits driven by low oil prices.

Related article: How will shale oil producers react to the rout in oil prices?

Related article: Oil prices unlikely to see a sharp rebound

What the Brazilian election might mean for commodity prices?

Brazil’s presidential election is heading for its second-round run-off on Sunday with the result too close to call. The latest polls show incumbent president Dilma Rousseff on 49% and the pro-business opposition party led by Aécio Neves on 51% but betting markets give Rousseff a 60% chance of winning. Given Brazil is a major supplier of commodities ranging from soybeans, iron ore, sugar and coffee what will the result mean for prices?

Overall the main impact on commodity prices will be felt through the country’s currency, the real. The unexpectedly strong performance of the pro-business party in the first election run-off at the start of October resulted in the currency soaring by almost 4% against the dollar, improving the value, in dollar terms of Brazil’s commodity exports. However, since then a narrowing in the polls has meant that the currency has lost all those gains and more.

Sugar is seen as the commodity most likely to be influenced by the outcome of the election. The Brazilian government introduced a cap on gasoline prices around 10%-20% below world levels in a bid to control inflation, but which has also squeezed ethanol margins for the country’s sugar cane mills. To recap, sucrose extracted from sugar cane can be manufactured into either raw sugar or ethanol. In Brazil, typically 48% goes into making ethanol and 52% goes into producing raw sugar, which is then processed into refined sugar.

According to sugar and ethanol cooperative Copersucar, ethanol demand in Brazil could increase by 8 billion litres to over 30 billion litres a year if the government were to allow state-owned oil major Petrobras to sell gasoline at market prices. Although the extent of any increase is by no means certain, a senior government official suggested  in August that gasoline prices could be raised by 6% following the election.

Given a win by Rousseff appears to be largely factored into both currency and commodity markets, a win by the incumbent is likely to have only a minimal impact on the nations key commodity prices. A win by Neves however would be bullish. The main factor affecting the price of Brazil’s commodities, agricultural ones in particular lie elsewhere – namely drought.

Ironically it could be the drought that was the opposition party’s undoing. São Paulo state, home to a quarter of Brazil’s voters and controlled by the party refused to introduce water rationing when the water crisis first became apparent. Now 70 cities in the state are estimated to have suffered regular shortages with the two main rivers in São Paulo city now full up with rubbish and raw sewage.

Related article: No sugar high in sight

Non-ferrous metal exploration slashed

Miners are slashing the amount they spend on exploration setting the stage for the next phase of the super-cycle according to data from SNL. The group estimates that the global budget for nonferrous metals exploration at $11.36 billion in 2014, down 25% from 2013 (the nonferrous exploration category refers to precious and base metals, diamonds, uranium and some industrial minerals but excludes iron ore, aluminium and coal).


In the case of a mining investment for example it is not spot commodity prices that incentivise new production, but the commodity prices assumed in feasibility studies, debt and equity raising’s. These long-run commodity price assumptions tend to lag spot prices. This suggests that exploration spending is likely to fall even further, even if non-ferrous metal prices rebound in the short term. Given the typical time horizon of a major mine can be as long as 20-30 years, with high initial capital outlay and traditionally slow capital return, the planning process of these firms has been designed to be very risk averse.

Once the economic case warrants a mine being brought into production it then typically takes around 7-10 years to take the discovery of a new deposit through to production. However, as the iron ore industry shows the economic and commodity price conditions may be very different when the mine is finally brought into production.