Goldman: Oil will drop back to 2015 low of $45

Published Tue, May 19 20152:01 PM EDT

Crude oil will fall back to its low for the year, Goldman Sachs said in a note to clients. The investment bank acknowledged Monday that it was wrong earlier this year in calling for oil prices to remain low, but said the rally that ensued will only give producers false confidence and make the downturn that much worse. A return to the 2015 low of about $45 a barrel for WTI oil represents more than a 20 percent decline from current levels. Source: FactSet From the March low to an intraday 2015 high of $62 a barrel earlier this month, WTI gained almost 50 percent. The report from Goldman commodities analyst Damien Courvalin and Jeffrey Currie said: "We expect evidence of this fundamental weakness to materialize by this fall in the U.S. weekly rig count, hedging flows, weakening refinery margins as the crude surplus shifts into a product surplus and monthly OPEC production and rig count growth. As a result, we believe that prices need to retrace their 1Q lows by this fall. Importantly, the longer this price decline takes to materialize, the greater the price downside given our already projected high inventories into 2016, especially in the U.S." They address why they got the direction of the last three months wrong here: "Our forecast for sustainably lower oil prices has not played out: After selling off sharply in January and March, prices are trading at their highest level since December. Key to the sharp rally has been the quick reaction by U.S. producers as well as a large demand response on track to beat even our out-of-consensus optimistic expectations. Despite this perception of improving fundamentals, we find that the global market imbalances are in fact not solved and believe that the rally will prove self-defeating as it undermines the nascent rebalancing." Finally, the analysts make a point about how investors are now overly bullish about a further rebound, a contrarian signal that spells trouble for crude. They note that the last time "net speculative positioning" was this long was when oil was at $100 a barrel a year ago. Read More Buffett-like investors will save bull market — Jackie DeAngelis contributed reporting.

Andrew Cullen | Reuters

Crude oil will fall back to its low for the year, Goldman Sachs said in a note to clients.

The investment bank acknowledged Monday that it was wrong earlier this year in calling for oil prices to remain low, but said the rally that ensued will only give producers false confidence and make the downturn that much worse.

A return to the 2015 low of about $45 a barrel for WTI oil represents more than a 20 percent decline from current levels.