Why Goldman Sachs Is Wrong About Commodity Prices: Philip Richards

The Mining Report: Goldman Sachs cut its price outlook for almost all commodities, including oil, which it said could go as low as in the high $30 per barrel ($30/bbl) range. Do you see that as realistic?

Philip Richards: I think that oil has now made a bottom. I look at Brent crude more than West Texas Intermediate. Brent bottomed at around $46/bbl and has since rallied around 30%. The reason for thinking that oil could go lower is that oil is a relatively price-inelastic commodity. That means if you have a big move in the price, you don’t necessarily get a big response on the demand side. Nevertheless, demand is picking up at these lower levels. In fact, even in the U.S., which is a material market, there has been a notable uptick in the growth of oil use at these lower prices, so oil is responding a bit on the demand side.

The other question is whether supply can move dramatically in one direction or the other. Now, Iraq is beginning to pump more oil, and may add another 1–2 million barrels per day (1–2 MMb/d) within the next two years. On the other hand, the whole Middle East is becoming increasingly traumatized, by the Islamic State in particular. There is ongoing unrest across the region, such as Shi’ite Houthi militia taking over strategic sites in Yemen. That could destabilize Saudi oil provinces, which have Shi’a Muslims, who are disaffected with the Saudi regime.

Largo Resources Ltd. has come into production.

Also, about 5% of oil production drops out of the equation every year simply because reserves run out. This is a commodity with production running at around 92 MMb/d, so about 5 MMb/d must be replaced every year. With the lower oil price, a lot …read more

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