Asia Stocks to Watch:Crude! Oil Falls Below $30, Goldman Says End Game Is Near

Goldman Sachs have been floating around the possibility of oil dipping into cash cost of $20 a barrel for a while, so it is refreshing to see the same Goldman Sachs talking about oil prices getting “closer to a bottom” this morning.

Near-term fundamentals in this oversupplied industry are deteriorating, which means that some pumpers could be closing shop eventually. Goldman wrote:

Latest datapoints suggest a deceleration in oil demand, driven by now tough year-on-year comps and weakening macro in emerging markets. With inventories of both crude and products continuing to rise, storage options are becoming limited, particularly in the European diesel market. Breaching diesel storage would force refineries to lower runs/shut down, temporarily reducing crude oil demand, and potentially forcing crude to be stored offshore, requiring a further steepening in the forward curve. Whilst not there yet, we are approaching levels that are likely to force production 

Latest datapoints suggest a deceleration in oil demand, driven by now tough year-on-year comps and weakening macro in emerging markets. With inventories of both crude and products continuing to rise, storage options are becoming limited, particularly in the European diesel market. Breaching diesel storage would force refineries to lower runs/shut down, temporarily reducing crude oil demand, and potentially forcing crude to be stored offshore, requiring a further steepening in the forward curve. Whilst not there yet, we are approaching levels that are likely to force production temporarily offline.

China, for instance, may be decelerating production (not that it really matters). Beijing last night put a collar on domestically regulated oil prices, thereby reducing incentives for Chinese oil majors to pump at below $40 a barrel.
But here comes the cold water. “Although a bottom is in sight, rebalancing may not be immediate.” Specifically, Goldman warned that stronger U.S. dollar results in cheaper production for countries such as Canada and Russia that saw their currencies tumble. Goldman estimates that cash costs could be on average 30% cheaper in 2015 than in 2014 because of the foreign exchange moves. That means overseas producers could hang on for longer.

Who will blink first? Goldman thinks if Brent falls below $30 a barrel, Canadian production in Saskatchewan, heavy oil in Mexico and Colombia, mature onshore fields in China and strip wells in the US will be “most pressured.” Well, China is already blinking.
This morning, Brent crude dipped below $30 a barrel again, down 0.8% recently to $29.95. China’s oil majors tumbled. Sinopec (386.Hong Kong/SNP) fell 4.7%, PetroChina (PTR/857.Hong Kong) retreated 2.5%, CNOOC (883.Hong Kong/CEO) dropped 3.7%. Overnight, United States Oil Fund (USO) fell 0.9%.