NEW YORK (Dow Jones)--Energy price forecasters remain convinced that falling oil prices and extreme volatility are going to get worse before they get better, even as futures hit multi-year lows.
Goldman Sachs Group Inc. (GS) said as much when it closed its oil trading recommendations, effectively admitting in a note late Wednesday that calls made in September to bet on a rebound are likely to continue to lose money. The bank's oil forecasts are among the most closely watched in the market. A May prediction of another "super spike" in prices by a different group of analysts within the bank helped to set the tone for the rally to a record high above $145 a barrel in July.
"We have left our oil trading recommendations open, expecting that high volatility would provide a better exit point to our trades," Goldman Sachs commodities analysts wrote in a note to clients. "In the near term, we do not expect significant upside potential and as a consequence we are closing all of our oil trading recommendations."
Goldman had in September recommended a three-way trade of options on March crude futures, which effectively bet that the contract would trade between $120 and $140 a barrel. That trade currently posts a loss of $23.99 a barrel, and the bank now expects oil prices to remain below $65 a barrel in March.
Oil prices fell to a session low of $49.75 a barrel Thursday, the lowest point since May 2005 and a 65% drop since the market peaked in July. Like the rapid move higher in the first half of the year, the near-total erasure of four years of gains has left analysts scrambling to cut forecasts quickly enough. Most maintain official near-term price targets between $60 and $70 a barrel, though usually with caveats of risk to the downside.
The December crude futures contract, which expires Thursday, is currently trading at $51.01 a barrel, down $2.61, or 5.5%.
While forecasters still give price targets above the current cost of oil, their reports increasingly focus on a loose conviction that crude futures are likely to move lower before they recover.
The fates of commodities markets and U.S. equities have been linked to an unprecedented degree for the last two months, ever since the near-collapse of the financial sector plunged economies worldwide into a severe downturn. The lead role played by stocks has allowed the market to ignore situations more directly tied to the availability of oil that might have halted past downturns, including a major hurricane that shut Texas refineries in September and the hijacking of an oil tanker by Somali pirates last weekend.
"We are facing some rather extreme circumstances," said Harry Tchilinguirian, senior oil market analyst at BNP Paribas in London. "The correction is not oil-specific."
Tchilinguirian last revised his oil price forecast on Nov. 12, to $65 a barrel in the fourth quarter and $63 in the first three months of 2009. In October, he expected oil to average $77.70 at the end of 2008 and $81.30 in the first quarter of 2009.
Moving The Market
While the views of large banks carry weight, the oil market doesn't take its cues from any one forecaster, even Goldman's, said Craig Pirrong, a professor at the University of Houston who specializes in commodities market behavior.
"People don't necessarily bet the ranch on what Goldman says publicly," Pirrong said. "It's Goldman, it has some credence ... but traders in particular, people that do this for a living, don't give it that much weight."
Still, Goldman's recommendation is the latest in a series of bearish notes from banks, helping to fuel the already negative sentiment driving oil prices. Crude futures could fall as low as $40 a barrel next spring as an overhang of new, efficient refineries come on line, an analyst at Deutsche Bank said Wednesday.
Goldman continues to expect a rally in the second half of 2009, with prices ending the year at $107 a barrel. The bank leads one camp that expects a new period of tight supplies and rising prices once economies begin to recover, albeit less dramatic than the runaway market seen earlier this year.
Others view the last few weeks as the start of a longer-lasting period of adequate production and lower prices. Demand may have permanently dropped in developed economies, while emerging markets are only just beginning to experience slower growth, wrote Antoine Halff, deputy head of research at brokerage Newedge USA in New York.
"Chances are recent events will in aggregate prove a game changer," Halff noted.
-By Brian Baskin, Dow Jones Newswires; 201-938-2062; brian.baskin@dowjones.com