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[LONDON] Oil will turn into a new bull market before the year is out as the price rout shuts down sufficient production to erode the global glut, according to Goldman Sachs Group Inc.
The crash in US oil futures - which sank back below US$30 a barrel on Friday to a new 12-year low - will send the nation's shale-oil boom spinning into reverse in the second half of the year, the bank said in a report. As US production slumps by 575,000 barrels a day, global oil markets will tip from surplus to deficit, Goldman predicts.
"The key theme for 2016 will be real fundamental adjustments that can re-balance markets to create the birth of a new bull market, which we still see happening in late 2016," analysts Jeff Currie and Damien Courvalin wrote.
The market will signal it's ready to rally when the forward price curve, which currently shows a steep discount on immediate commodity supplies, starts to flatten out, the analysts said. The end of that discount would demonstrate that there's enough demand to whittle down oil that's piled up in storage tanks, they said.
"A flat curve near cash costs is historically the buy signal for passive investors and we believe the current bear market will end the same way," Currie and Courvalin said. "Such a signal is what will shift us to being bullish commodities."
Goldman, which has warned that the oil market might not re- balance unless prices fall to US$20 a barrel, forcing production cuts among shale operators, said this remains a possibility. Still, the US$20 scenario remains an outlier rather than their most-likely case, and would only be realized if oil storage space runs out. As that's unlikely, the bank said it's sticking with its forecast of US$40 a barrel for the first half.