Investing

Next six months likely 'painful' for oil, says Goldman Sachs' Jeffrey Currie

Key Points
  • Oil prices are trading at their lowest level in four years after talks between OPEC and its allies deteriorated.
  • Goldman Sachs global head of commodities research Jeffrey Currie said that things are likely going to get worse.
  • "The next six months are likely to be painful," he said Tuesday on CNBC's "Halftime Report." "I think you're going to start to see some real problems beginning to develop."
  • On Monday, U.S. West Texas Intermediate crude and international benchmark Brent crude dropped 24% for their worst day in nearly 3 decades.
VIDEO10:2910:29
Oil price war second effect of coronavirus: Goldman Sachs' Jeff Currie

Oil prices are already trading at their lowest level in four years after talks between OPEC and its allies deteriorated, and Goldman Sachs global head of commodities research Jeffrey Currie said that things are likely going to get worse.

"The next six months are likely to be painful," he said Tuesday on CNBC's "Halftime Report." "I think you're going to start to see some real problems beginning to develop. The stress on the balance sheets were already there before Monday," he added.

As tensions between Saudi Arabia and Russia accelerated over the weekend, Goldman Sachs slashed its oil price targets for the second quarter. The firm now sees U.S. West Texas Intermediate crude at $29 per barrel, and international benchmark Brent crude at $30 per barrel. Goldman's prior estimates were $42.50 and $47, respectively.

On Tuesday, both contracts rose more than 8%, pushing WTI $33.82, and Brent to $37.13. The spike higher was a stark reversal from Monday's 24% drop, which was oil's worst day since 1991.

WTI has plummeted 49% this year, and before Monday's steep drop was already trading at depressed levels. Among the factors driving prices lower is the coronavirus outbreak and subsequent travel slowdown, which has led to softer demand for crude.

Currie said that lower prices will force a consolidation — especially among the smaller exploration and production companies — which he views as beneficial for the entire industry. He predicts that "way more than a dozen" companies will get be consolidated "in some shape or form."

His comments came as Occidental Petroleum on Tuesday slashed its quarterly dividend by 86%, after tanking 53% on Monday.

As Saudi Arabia and Russia reportedly prepare to ramp up oil production, Currie said to prepare for "significant downside spikes towards $20 per barrel in the coming months."

The possible production increases follows a deterioration of talks between OPEC and its allies in Vienna. On Thursday, the 14-member cartel suggested additional production cuts of 1.5 million barrels per day as the coronavirus outbreak hit demand. But on Friday, OPEC ally Russia rejected the additional cuts. The meeting also ended with no extension of the cuts that are currently in place but expire at the end of March, meaning nations can pump as much as they want beginning April 1. 

On Tuesday Saudi Aramco CEO Amin Nasser said that the kingdom plans to supply a record 12.3 million barrels per day (bpd) in April, well above current production level of 9.7 million bpd. In response, Russian Energy Minister Alexander Novak said that Russian oil companies may boost output by up to 300,000 barrels per day, according to a report from Reuters, while noting that the country has the ability to increase production by as much as 500,000 barrels per day.

Over the longer term, however, Curries believes this is a necessary re-balancing of the market.

"The economics or rationale of a production cut never made sense to begin with," he said. "With prices down at these lower levels, we're seeing an acceleration of that rebalancing process that is going to create a healthier industry as we look out 2 or 3 years from now." 

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.