Crude prices climbed 10% on Friday, one of the biggest daily rallies ever, rising above $32 a barrel after plunging below $27 a barrel this week. But analysts are skeptical that the two-day bounce could likely be the start of big, lasting reversal.
Prices will be locked between $20 and $40 a barrel for several months—even beyond 2016’s midway point—as the oil market forces the global oversupply to evaporate, Goldman Sachs was cited as saying by Oil Price.
“The path to a rebalanced market will likely be both protracted and arduous,” Goldman said in a research note, calling the current market trend a "transitional inflection phase".
Goldman analysts wrote, as crude prices dropped into the high $20-range this week and the oil market began telegraphing signs that both financial and operational stress were weighing on North American drillers. At $40 oil, US driller debt defaults begin to accelerate. At $20 oil, wells get shut in, according to Goldman. As crude prices plunged this week, US oil markets “showed tell-tale signs of breaching storage capacity”.
It could indicate, Goldman said, that the market plunge this week had more to do with cramped energy infrastructure than global demand metrics.
As the February US oil contract expired on Wednesday, crude buyers forced prices down because of limited storage capacity at the Cushing, Oklahoma oil hub.
“There’s an incredible lack of storage space,” said John Kilduff, an oil market analyst and partner at Again Capital.
“Say you’re a seller trying to get out of the final contract you may be holding. It’s a buyer’s market. They’ll take it off your hands but they’ll want a substantial discount.”
Goldman said wellhead prices dropped below $10 a barrel for several grades of crude across the nation, with one refiner posting $1.50 a barrel for heavy-sulfur crude from North Dakota. It was a sign that refiners are wary of taking in too many more barrels of crude, Goldman said.
It is “an indication that these barrels, particularly the sour barrels that are infrastructure captive, are struggling to find homes and will likely need to be shut in soon once all options are exhausted”, Goldman analysts wrote.
