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Oil lurches closer to $20 Goldman Sachs doomsday forecast: ‘The supports are crumbling’

Goldman's drastic scenario was based on the logic that the market might have to undergo a US$20 per barrel price shock in order to force an acceleration in the shutdown of unprofitable production. That no longer seems fanciful.

LONDON — When U.S. investment bank Goldman Sachs said last year that oil could fall as low as US$20 per barrel, it assigned a fairly low probability to that scenario.

Canadian crude — the world’s cheapest oil — falls to record low as slump deepens

Brent Lewin/Bloomberg

A deepening oil market slump is adding fresh pain for producers of the world’s cheapest crude as the Canadian heavy grade reached a record low, raising the prospect of more production coming offline.

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Fast-forward five months and in some parts of the world the forecast has already proved correct. Canadian physical crude has been selling this week at below US$20 per barrel, less than it costs to extract and transport. Traders in the options market, meanwhile, are taking protection against prices falling below US$25.

The developments reflect growing concerns that a market already awash in too much oil is now suffering the double-whammy of a sharp slowdown in U.S. and Chinese demand.

For the past 18 months, oversupply has been the main factor responsible for dragging down prices by two-thirds, after Saudi Arabia pushed OPEC to ramp up exports to fight for market share with higher-cost producers such as U.S. shale firms.

Low prices spurred global demand to multi-year highs, saving oil from a further collapse and encouraging producers to hope that the market might recover later in 2016.

But just as Saudi Arabia was about to start celebrating its first tactical victories, with U.S. output declining under pressure from low prices, signs are emerging that demand in the United States, China and Europe is much weaker than anticipated.

Estimated demand from China, the world’s second largest consumer and the engine of global economic growth since the commodities boom started in the early 2000s, fell in both September and November, compared to the same months of 2014.

U.S. demand, the world’s largest, began falling from October, according to the latest available data, despite low gasoline prices, while U.S. distillate demand slid to its lowest for more than a decade towards the end of 2015.

Demand in the European Union turned flat in October, having surprised on the upside throughout most of the year.

“2015 started off with a spectacular growth in demand. But in the last quarter of 2015, things seem to have changed,” said Abhishek Deshpande, an analyst at banking and investment group Natixis.

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