Goldman Sachs Analyst Jeff Currie cut his 6-month forecasts yesterday for Brent to U.S. $42 a barrel, from U.S. $80 a barrel, and for U.S. West Texas Intermediate (WTI) to U.S. $39 a barrel, from U.S. $75 a barrel, citing expected substantial first-half inventory builds.

Record imports of crude oil from China doesn’t help much to absorb the supply glut. China said yesterday that they imported a record 31 million tons of crude oil, or an equivalent to 7.2 million barrels per day, in December. Crude oil production in China is estimated to be at 4.2 million barrels per day. 

Crude oil futures for delivery in February 15 [CLG15.NYM] on the New York Mercantile Exchange (NYMEX), took a nosedive for the third day in the row, to an intra-day low of U.S. $44.20 per barrel, and took the U.S. equity markets along with it. The 10-year U.S. Treasury yield tumbled again today, to an intra-day low of 1.864%.

The relationship between the equity markets and crude oil prices follows a general rule that crude oil prices move in the same direction as inflation, measured by the All Items Consumer Price Index or CPI-U. As market uncertainty rises and crude oil prices decline, investors sell equities and buy bonds as a “Flight To Quality”, or a risk-off trade. 

Jeffrey Gundlach, CEO of DoubleLine Capital, a fixed income investment management firm with over U.S. $60 billion in assets, told Barron’s last week that the 10-year U.S. Treasury yield might break its record low of 1.38%, citing declining oil prices which help bonds because of their deflationary impact.

If Mr. Gundlach is right with his number, it is possible that crude oil could break the U.S.$44.17 a barrel level, or the lower support line of the 16-year rising wedge pattern. The next technical support will be U.S.$40 a barrel level. If this happens, kudos to Goldman for making a good call on crude oil.