As Goldman Sachs Touts $20 Crude Price, Should You Keep On Selling Tullow Oil PLC, Gulf Keystone Petroleum Limited And Cairn Energy PLC?

US banking giant Goldman Sachs has shocked the market yet again in recent days, this time by taking the hatchet to its 2016 crude price forecasts. And boy, did the firm wield the axe — thanks to abundant supplies the broker now expects the WTI benchmark to average $45 per barrel in 2016, down from its previous estimate of $57.

But most worryingly Goldman Sachs cautioned that WTI could plummet as low as $20 per barrel. The Brent benchmark touched fresh six-and-a-half-year troughs of $42.50 late last month, some way off Goldman Sachs’ worst-case scenario projection but still underlining the bearish sentiment that threatens to keep oil prices under the cosh.

Goldman Sachs advised that “the oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,” adding that “the potential for oil prices to… $20 per barrel is becoming greater.”

Goldman Sachs’ latest predictions may at first look outrageous. But then again, anyone who dared suggest that Brent could collapse from a peak of $115 per barrel last summer to below $50 within six months would be considered barking mad. And Goldman Sachs isn’t the only broker to warn of another shunt lower in the crude price — just last month Citi also suggested the black gold price could be on the cusp of visiting $20.

OPEC continues to concern

And OPEC’s latest statement this week has done nothing to quell fears of persistent oversupply, either. On the one hand, the cartel upgraded its oil demand forecasts for 2015 and now expects consumption to grow by 1.46 million barrels per day this year, to 92.79 million barrels per day.

But OPEC also reduced its forecasts next year “due to the projected slower economic momentum in Latin America and China” — the group now expects oil consumption to rise by 1.29 million barrels by day in 2016, resulting in total off-take of 94.08 million barrels per day.

All the while global output levels continue to rise. Whether or not sizeable US production cutbacks come to pass, output from the rest of the world’s oilfields continue to shoot northwards and OPEC’s own production rose to 31.54 million barrels per day in August, up around 13,000 barrels from the previous month.

Oilies on the defensive

Naturally these readings should make gruesome reading for operators across the fossil fuel segment. Tullow Oil (LSE: TLW) saw total revenues collapse by more than third during January-June, to $820m as previous hedging failed to tackle the full impact of a tanking crude price.

Things have been brighter over at Gulf Keystone Petroleum (LSE: GKP), however, and the company saw the top line expand to $30.1m during the first six months of 2015 from $18.7m a year earlier. However, the Kurdistan-focussed business had a 102% production flip to thank for this performance — total production clocked in at 4.7 million barrels in January-June.

Meanwhile, the earnings prospects of exploration play Cairn Energy (LSE: CNE) is also under pressure as the economic viability of its assets comes under question. The company is not alone in this predicament, of course, and while Cairn remains expects maiden oil at its Kraken and Catcher fields in the North Sea in 2017, a prolonged period of crude price weakness could see development work grind to a halt.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.