The risk that oil could fall as low as $20 a barrel is rising, with a persistent surplus requiring prices to remain lower for longer to rebalance the market, Goldman Sachs said, cutting its forecasts again.
"While we are increasingly convinced that the market needs to see lower oil prices for longer to achieve a production cut, the source of this production decline and its forcing mechanism is growing more uncertain, raising the possibility that we may ultimately clear at a sharply lower price with cash costs around $20 a barrel Brent prices," Goldman said in a note Friday.
The sources of stress: an abundance of oil coupled with a scarcity of storage space. The bank estimates the industry added around 240 million barrels of petroleum to storage tanks from January to August. It projects available identified storage capacity outside China at around 375 million barrels and expects an around 240 million barrel inventory build outside China between September of this year and the end of 2016.
"If you don't bring U.S. or global production down low enough underneath demand to create that rebalancing then you're likely to slam into storage capacity constraints and that would put that downward pressure," said Jeffrey Currie, head of commodities research at Goldman, in a CNBC "Power Lunch" interview Friday.
But it noted $20 a barrel isn't its base case, even though risks that oil will fall that low continue to rise, especially as the bank expects only moderate production declines through the end of the year. There is a less than 50 percent chance it would reach $20 a barrel, Currie noted.