Oil prices nearing 'capitulation', Goldman Sachs says

By Ovunc Kutlu

NEW YORK (AA) - After falling nearly 5 percent Thursday to their lowest level in five months, crude oil prices are nearing a capitulation point, Goldman Sachs said in a report Friday.

The recent decline in crude prices to below $50, and additional losses Thursday, has wiped out a recovery that began late last year after OPEC and Russia agreed to limit production levels.

Many hoped the deal would have kept the prices above $55.

Goldman said, however, that "long term oil prices have continued to steadily decline on growing evidence that the oil market can balance close to $50 per barrel”.

There is "growing evidence of the ability of U.S. shale to respond near $50 per barrel and the availability of capital to support such activity”, the report said.

While American oil companies reduced their capital expenditures and adopted more efficient production methods, they successfully adapted to a low price environment.

Much of the reason behind low oil prices since 2014 has been a price war between U.S. shale producers and OPEC. The war could jeopardize the possibility the OPEC-Russia deal would be extended into the second half of the year.

"This surge in U.S. oil production is important as it risks offsetting the impact of continued high OPEC compliance which reached 110 percent in April," Goldman said.

Crude prices recovered 2 percent Friday, but remained below $50 as investors took a short-term buying position to benefit from Thursday's slump.

There is now the possibility prices will remain below the critical $50 threshold if U.S. oil production continues to increase, and OPEC and Russia fail to extend the production deal into the second half of the year.

OPEC will hold its semi-annual meeting May 25 to discuss the current price environment and the general global oil market.