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Oil heads higher as Goldman Sachs turns bullish

Oil prices are up three per cent today as U.S. investment bank Goldman Sachs says the supply glut has vanished.

Oil prices up 3% today as U.S. investment bank says the supply glut has vanished

A million barrels of oil a day was removed from the market in Alberta in the past two weeks as a result of the fires in Fort McMurray, with production just now starting to rise very slowly. (Jason Franson/Canadian Press)

One of the oil market's biggest bears is heading back into its cave for now.

Crude oil is trading at a six-month high above $47 US a barrel, as Goldman Sachs said the oil market has gone from a supply glut to a deficit sooner than expected. Goldman raised its forecast for oil to $50 US a barrel for the second half of the year.

The fires in Fort McMurray and supply disruptions in Nigeria have knocked the market into balance this month, and Goldman now expects a supply deficit in May.

"The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," said Goldman in the report.

1.8 million barrels a day off the market

A million barrels of oil a day was removed from the market in Alberta in the past two weeks as a result of the fires in Fort McMurray, with production just now starting to rise very slowly. In Nigeria, production is down by 800,000 barrels per day as militants attack oil facilities in that country.

The world was thought to be oversupplied by between one and 1.5 million barrels per day, which means that the two outages alone flip the market from surplus to deficit. But both outages are short-term. Within weeks, oilsands production should be returning, and Nigeria has begun arresting the militants behind the attacks there.

"I think that [Goldman Sachs is] behind the 8-ball on this," said Rob Mark, an energy analyst with Toronto investment bank 3Macs. 

"Goldman been more negative than some and they're taking the unexpected impact of the Fort McMurray fires and the instability in Nigeria, and earlier instability in Libya, to switch their call."

Goldman Sachs had been calling for oil to hit $20 US a barrel, and it got very close to that level in the winter, bottoming at $26.19 US a barrel in February.

Alberta producers facing insolvency

A recovery in prices cannot come soon enough for some heavily indebted oil producers nearing insolvency.

Earlier today, Connacher Oil and Gas announced that it was seeking bankruptcy protection. Penn West Petroleum said that it was in danger of defaulting on its debt by the end of June. Lightstream Resources said that it may also be in default by the end of the quarter.

Those companies and others in a similar predicament need a sustained period of higher oil prices.

Mark said that as oil prices move higher, bankruptcies will continue, because they tend to lag movements in the price of the commodity, but $60 US oil is the number the market is waiting on

"My best guess is that you can get a sustained, two-plus quarters, at a price north of $60 US a barrel, then costs will have come down enough that it will skate a majority of companies back into the black."

That is not a price Goldman is expecting this year or next.

It is calling for the market to be out of balance again next year, with 400,000 barrels a day of oversupply, as Russia and producers in the Middle East increase output and demand falls after the summer driving season ends. Although it expects oil to trade at $50 US a barrel this year, Goldman Sachs also thinks oil will slip to $45 US in the first part of 2017.

So, the Goldman bear is asleep, but only for now.

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