Goldman's view of the world in 2016

Published Thu, Nov 19 20154:07 PM ESTUpdated Thu, Nov 19 20154:23 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

The world's capacity to store oil is bursting at the seams, and Goldman Sachs has identified crude storage as a problem that could potentially be a 2016 risk to credit and risk assets in general. The firm rolled out its investment themes for next year Thursday, providing its view on stocks, the dollar, the economy, fixed income and commodities. Among its forecasts are that fixed income markets will continue to face liquidity issues and that stocks will end the year close to current levels — 2,100 on the S & P 500 — due to the " Yellen call." The Goldman analysts say the downside risks to inflation aren't as great as expected, while global GDP growth should rise to 3.6 percent thanks to a pickup in depressed regions such as Brazil and Russia. But the firm did identify one bubbling concern in the oil market that could spread to broader markets, under the right circumstances. The Goldman energy team said there is an increasing risk that oil inventories will grow beyond the capacity to store them. While its energy analysts do not expect storage capacity to be exhausted, it could happen if there is a sudden drop in demand. Then crude would flood the physical market and prices would drop sharply. "Given the high exposure to the energy sector in global credit markets (most notably in EM and U.S. high-yield), this downside risk to oil is among our top downside risks to credit and risky assets more generally," the analysts wrote. Goldman analysts forecast West Texas Intermediate crude will rise to $52 per barrel by the end of 2016. In September, the firm reduced its WTI forecast for 2016 to $45 from $57, and said it could even fall as low as $20 per barrel. "Over the course of 2015, oil demand was spectacularly strong, especially in light of the modest slowing in global growth, but the supply surprise was even larger, the result of which was an even greater decline in oil prices than we originally forecast," they wrote. In a note in late October, Goldman oil analysts pointed to an increase in storage of distillates — like diesel — to high levels in the U.S. and Europe. The rise in storage comes on the heels of near-record refinery utilization and only modest growth in demand. At the same time, they say there are increased imports from Asia on refinery expansion and strong Chinese gas-oil exports. "This also raises the question of whether today's oil market can rebalance through financial stress — prices remaining near their current low level through 2016 — or if operational stress — breaching storage capacity and forcing prices below cash costs — is unavoidable," they wrote. Other investing themes in the report: Stocks will rise modestly to the 2016 price target of 2,100 on the S & P 500, while earnings per share will rise 10.1 percent. Dollar is main beneficiary of Fed tightening cycle, expected to begin with first hike in December. Global GDP to rise to 3.6 percent in 2016. (U.S. decelerates to 2.2 percent). 12-month forecast for EUR/$ remains 0.95 (could be sooner). 12-month dollar/yen forecast remains 130. Risks to commodities like energy and industrial metals are to the downside near term. EM currencies to be stable on a trade-weighted basis.

An employee rides his bike past barrels of petroleum products at a state-owned Pertamina fuel depot in Jakarta, Indonesia.

Darren Whiteside | Reuters

The world's capacity to store oil is bursting at the seams, and Goldman Sachs has identified crude storage as a problem that could potentially be a 2016 risk to credit and risk assets in general.

The firm rolled out its investment themes for next year Thursday, providing its view on stocks, the dollar, the economy, fixed income and commodities. Among its forecasts are that fixed income markets will continue to face liquidity issues and that stocks will end the year close to current levels — 2,100 on the S&P 500 — due to the "Yellen call."

The Goldman analysts say the downside risks to inflation aren't as great as expected, while global GDP growth should rise to 3.6 percent thanks to a pickup in depressed regions such as Brazil and Russia.

But the firm did identify one bubbling concern in the oil market that could spread to broader markets, under the right circumstances.