Stop the Madness — Oil Prices Won’t Go to $20!

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Goldman Sachs (GS) sent ripples through the global energy markets today with its ridiculous view that oil prices could hit $20 a barrel if the global economy gets bad enough. By early afternoon, crude oil had fallen more than 2% to below $45 a barrel.

Stop the Madness -- Oil Prices Won't Go to $20!Please, whatever you do, do not start trading as if $20 oil is imminent. It’s not.

There’s no denying that commodities — and oil prices in particular — are in a bear market, but ditching solid energy stocks right now because Goldman Sachs is running around saying the sky is falling isn’t the right move.

Here’s are a few reasons you should abandon the idea of $20 oil.

Gimme a Break

First off, Goldman’s call for $20 oil isn’t really a “call” at all. The bank merely said that crude prices could get to $20 a barrel if the global economy went into the gutter. That’s a pretty vacuous statement, especially since Goldman’s official forecast for 2016 U.S. crude prices is $45 and its outlook for 2017 remains unchanged at $60.

That’s like saying, “I think Google (GOOG, GOOGL) could hit $1,000 a share … if a billion more people start using the Internet next year and cost-per-click rates double across the board. My real target, though? $680 seems attainable …”

By saying prices “could” hit $20, the folks at GS are hedging their bets, which makes their calls entirely worthless to individual investors.

To Goldman’s credit, it lists some very real issues facing oil prices today to support its bearishness. In slashing its 2016 forecasts from $57 a barrel to $45, it cited the global oil supply glut and a decelerating Chinese economy. Commerzbank of Germany also lowered its target to $55 by the year’s end.

Heck, even OPEC officials themselves expect oil prices to remain in the $40 to $50 range through 2015, according to a recent report from the Wall Street Journal.

But the same article also quotes an anonymous OPEC official as forecasting $60 oil “by the first quarter of next year.” That’s roughly a 33% increase from current levels, and despite the supply glut, there’s reason to believe that’s very possible.

That’s more than feasible, mostly because OPEC has the ability to slow the flow of its spigot and reduce production, thus easing oversupply concerns and putting upward pressure on oil prices.

And not only does OPEC have the ability to cut back on its drilling, it has the motivation to do so. The economies of OPEC member nations are entirely driven by oil revenues, and with prices down 50% year-over-year, these countries are feeling the pain.

It’s not just U.S. shale oil drillers that are suffering from the price declines. Venezuela is calling for an emergency meeting of OPEC member nations to discuss how to prop up prices again. Nigeria, too, can’t sustain $45 oil forever, and even the most prolific driller of the group, Saudi Arabia, is projected to burn through its $655 billion in cash reserves by summer of 2018 if prices average $40 a barrel between now and then.

So What’s an Investor to Do?

There are plenty of other reasons oil prices are more primed to rally than continue their fall, but suffice to say, $20 oil ain’t coming anytime soon.

In the meantime, if you’re a contrarian aching to bet on a rebound, there are some aggressive ways to play rising oil prices as well as some low-risk, more traditional strategies.

The United States Oil Fund (USO) is a decent way to track oil prices directly, while straightforward investments in integrated oil and gas majors like Exxon (XOM) and Chevron (CVX) remain excellent conservative long-term plays.

At the end of the day, it’s always best to ignore the squawks of Chicken Little and form your own opinions. Goldman’s $20 “call” on oil gives us another opportune time to think for ourselves.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/oil-prices-gs-xom-cvx-uso/.

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