Goldman Sachs slashed its oil forecast on Tuesday as the COVID-19 outbreak continues to pressure demand.
"Demand losses across the complex are now unprecedented," Goldman's global head of commodities research Jeffrey Currie wrote in a note to clients Tuesday. The firm said that oil use has fallen by eight million barrels per day as the coronavirus has led to a near standstill in travel, among other things.
Goldman now sees U.S. West Texas Intermediate crude and international benchmark Brent crude both averaging $20 per barrel in the second quarter. Earlier on Tuesday the firm said WTI would average $22, before revising the forecast to $20 just a few hours later.
Goldman has cut estimates multiple times in the last few weeks. The firm previously lowered its target for WTI to $29 and Brent to $30 after the breakdown in OPEC talks earlier in March.
WTI settled at $28.70 on Monday, so the new target implies an additional 30% downside ahead. This would be on top of WTI's 53% drop this year. Goldman's Brent target is 33% below the contract's Monday settle of $30.05.
The drop in demand comes as powerhouse producers Saudi Arabia and Russia get set to ramp up production beginning April 1, which is when the OPEC+ production cuts currently in place expire.
The firm said that the sudden drop-off in demand, which began in January when the virus started hitting Chinese fuel demand, aided the price war that's broken out between OPEC and its allies, which includes Russia.
"While it is tempting to view the COVID-19 oil demand shock and the oil 'price war' as separate events, we like to emphasize that OPEC+ pursuing a market share strategy is simply a second-order effect of the virus made possible by extremely weak demand, pushing the market far down the global supply curve," Currie said.
Goldman said that the virus will likely lead to far worse outcomes than previously thought — even below estimates from just a month ago — for both the commodities and equity market from just last month.
On Sunday, Jan Hatzius, Goldman's chief economist, lowered his first-quarter GDP growth forecast to zero from 0.7%. The economist also sees a 5% contraction in the second quarter, followed by a sharp snapback for the remainder of the year.
But unlike equities, which the firm believes will swiftly rebound, oil will likely stay lower for longer.
"While financial markets are forward-looking and are likely to rebound once the contagion stabilizes, commodity markets are spot assets and must clear the surpluses developing today from weak demand and rising supply," Currie said.
Longer term, however, Goldman believes lower prices will lead to a beneficial re-balancing of the market.
"The industry is likely to emerge in a much more healthy position with many of the zombie companies that were a dead weight on returns removed," the firm said.
- CNBC's Michael Bloom contributed reporting.