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Goldman: This may push oil to $20

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.

Cuts to production are not "significant enough," as low-cost output continues to surprise to the upside, Currie added. Risk that neither producers with strong balance sheets nor weak balance sheets would want to trim production "reinforces this idea of lower for longer," he noted.

Goldman cut its one-month, three-month, six-month and 12-month WTI oil price forecasts to $38, $42, $40 and $45 a barrel, respectively. That's down from $45, $49, $54 and $60 previously.

It cut its average price forecast for 2016 to $45 a barrel from $57.

Brent for October delivery settled down 75 cents at $48.14 a barrel on Friday, while U.S. crude fell to $44.63 a barrel, down $1.29. That follows a wild ride for oil prices, with crude rallying from a low of $37.75 touched Aug. 24, with daily swings of more than 5 percent in either direction.

"The oil market is even more oversupplied than we had expected," Goldman said. "We now forecast this surplus to persist in 2016 on further OPEC production growth, resilient non-OPEC supply and slowing demand growth, with risks skewed to even weaker demand given China's slowdown and its negative emerging market feedback loop."

—CNBC's Amanda Diaz contributed to this article.