Via: Source

There has been a LOT of movement in financial markets this summer. China, Greece, and geo-political instability across the world have all combined to send indexes swinging up and down intensely. And now, coming on the heels of a new report out of Goldman Sachs, another indicator of fundamental shifts in the market; this time in the commodities market, has come to the surface.

Earlier this week, Goldman Sachs has issued a statement basically saying that the global surplus of oil is even larger than they had previously predicted, and that the surplus could last into 2017, sending prices for crude oil as low as $20 dollars per barrel.

On first glance, this would appear to be a very good. This would send the price of a gallon of gas at the pump below $2 for the first time in years, and some analysts have speculated, sustained prices that incredibly low may actually spur an increase in American manufacturing; a sector of the economy which has famously (infamously?) been in decline for decades now.

However, when given a longer, more thoughtful glance, prices that low create a diminishing returns scenario. Prices this low would signal systemic weakness in the commodities market. One of the reasons we are seeing this weakness is because prices this low could create a systemic shift in the commodities field, permanently putting American shale oil businesses under. 1 and 2 year views on oil are all lower, with virtually no analysts predicting a return above around $60 per barrel. If oil stays at 30-40 dollars per barrel, economists like Erwat Prasad predict that could be the ideal set of supply and demand circumstances, keeping US production viable, but prices also low. The real problems of diminishing returns may begin if the value dips lower than that for a sustained period of time. This price level would put massive pressure on a number of governments all around the world which depend on their oil exports, like Saudi Arabia or Argentina. This would spur on central bank action, the ramifications of which are not yet known.

The commodities market is certainly one to keep an eye on in coming months.