NEW YORK (TheStreet) -- Oil prices may drop as low as $20 a barrel before rebounding because an increase in Middle Eastern oil production is worsening an existing supply glut, Goldman Sachs said.
Prices for West Texas Intermediate crude oil produced in the U.S. have already reached the New York investment bank's $45 forecast for the fall, analyst Damien Courvalin said in a report on Friday. While that occurred against a backdrop of market turmoil caused by China's slowing economy, it's warranted by fundamentals like the surplus, Goldman said.
The bank lowered its oil price forecast for 2016 by $12, to $45 a barrel, and said prices may touch $38 a barrel within a month. The drivers of the current surplus will continue through next year as the Organization of Petroleum Exporting Countries, or OPEC, increases production and China's economic slowdown causes demand to flatten, Goldman said.
"The rebalancing of supply and demand is proving to be far more difficult than previously expected," Courvalin wrote. "While we are increasingly convinced that the market needs to see lower oil prices for longer to achieve a production cut, the source of this production decline and its forcing mechanism is growing more uncertain."
That raises the risk that prices will reach as low as $20 a barrel for Brent crude produced in Europe, a drop that would "prove transient and help to immediately rebalance the supply and demand for barrels," Courvalin wrote.
Brent crude prices have fallen about 17% this year, to about $47.74 a barrel, compared with a high of $146 in 2008, according to data compiled by Bloomberg. West Texas crude has dropped about 16% to $44.68 a barrel, down from a 2008 high of about $146.
This article was written by a staff member of TheStreet.