The United States Oil Fund L.P. (USO) — an exchange-traded fund that tracks oil prices — and Goldman Sachs (GS) may be telling you something you didn’t know about crude oil.
Oil prices may be nearing a bottom, and, as 2016 opens, there’s a potential of profit to be made buying into the United States Oil Fund L.P. (USO).
That’s something to say, knowing that investing in oil has been a nightmare for years. USO fell nearly 46% in 2015 after falling about 42% in 2014. From a June 2014 peak, the ETF has fallen 75%, and USO is down more than 90% since peaking in 2008 above the $117 mark.
It can’t get much worse, can it?
Well, at the end of last year, Goldman Sachs said it could — but that may be a good thing.
The most powerful U.S. investment bank forecast in September that the price of light sweet crude, the benchmark U.S. crude oil, could fall to as low as $20 a barrel. Goldman reconfirmed that forecast at the end of last year. If that’s the case, USO could fall to maybe $5 or so.
When Goldman Sachs talks oil prices, a lot of people listen. But when Goldman Sachs takes an extreme position — $20 crude oil is pretty extreme — it also could be a signal that the market closing in on a turn.
Consider the spring of 2008, when Goldman analyst Arjun Murti reiterated his March forecast that crude oil could experience a “super-spike” — and hit $200. At the time, crude oil was trading around $125 a barrel.
Murti’s idea had generated lots of buzz in large part because it was Goldman Sachs talking. It weighed heavily on the stock market, especially after The New York Times published an interview with him about his forecast on May 21. The Dow Jones Industrial Average fell 227 points that day.
Oil prices, however, peaked soon after the NYT interview appeared, with crude oil peaking at “only” $145.31 on July 3. By Christmas 2008, crude oil had slumped to around $32 because of the global financial crisis and declines in global gasoline demand.
Crude oil did come back and reached $107.95 in June 2014 before collapsing again — by a whopping two-thirds — after Saudi Arabia, the dominant player in the Organization of Petroleum Exporting Countries, said it wouldn’t limit its own production to support crude oil prices.
The result: Global supply exceeds global demand.
The Saudi move was seen as a bid to cripple Russian and U.S. oil production. The latter had soared thanks to high prices and the successful utilization of fracking technologies. It’s also true that the Saudis were watching — and are still watching — Iran and ISIS, its political rivals in the Persian Gulf region.
The problem of lower oil prices is not limited to USO. Chevron (CVX) recently cut its capital spending budget by 24% to $26.6 billion. Oil prices are now so low that oil drillers are shutting down in the United States and elsewhere. Near the end of last year, according to Baker Hughes, the U.S. rig count was off 64% from its recent peak of 1,931, reached in September 2014. Bankruptcies and layoffs in the oil patch have soared. Production is likely to shut in during 2016. Close to 40 oil and gas companies had filed for bankruptcy protection by the end of November, the Houston Chronicle reported.
And Goldman Sachs thinks oil prices could drop to $20.
Forecasting oil prices is just about impossible. Crude oil was supposed to go nowhere when 2015 began. Instead, it rebounded nearly 40% between the end of January and mid-June and then fell apart again. USO moved up about 25% before it, too, dissolved.
Oil prices have become wildly volatile, battered daily by supply-and-demand concerns, weather, politics, war and fears of war, environmental questions and the like.
Still, oil prices can’t fall forever. A turn is coming yet again and, with it, at least a modest rally. So, watch USO and crude oil prices. There still may be opportunity, and soon.
As of this writing, Charlie Blaine did not hold a position in any of the aforementioned securities.
