Goldman Sachs said it was staying bullish on oil prices, despite the selldown in recent weeks amid a slew of concerns that OPEC may boost production, emerging market demand was faltering, trade wars were escalating and inventories were rising.
“The oil market remains in deficit with resilient demand growth and rising disruptions requiring higher core OPEC and Russia production to avoid a stock-out by year-end,” Goldman said in a note dated Monday.
Its base case was for core OPEC and Russia to boost production by 1.0 million barrels a day over the second half of this year, but for that to be offset by declines elsewhere, leaving production up only a net 450,000 barrels a day from the second quarter.
Goldman added that its demand growth forecast was still above consensus, with the largest emerging market and developed market consumers still seeing the strongest growth; it said it expected there would need to be “a sharp collapse” in emerging market activity to bring the oil market into surplus. It also said it expected that trade tensions wouldn’t impact global economic growth much.
It forecast “further moderate declines” in inventories in OECD countries in the second half of this year and the first half of next.
Upside to its year-end Brent forecast of US$75
“However, this does not accurately reflect the tightness of the oil market that we expect, as inventories are already below normal and the moderate declines are only achieved through core OPEC and Russia production reaching new record highs next year,” it said.
Goldman said it now expected the oil market to be “moderately tighter” through the second quarter of 2019 than it had previously.
“While concerns over OPEC production and demand may continue to weigh on prices in the near term, this leads us to reiterate our forecast for Brent prices to rally further, with risks to our peak $82.50/barrel forecast still skewed to the upside later this year.”
Goldman said it also saw upside to its year-end Brent forecast of US$75 a barrel.
ICE Brent crude oil futures for August were down 0.73 percent at US$74.79 a barrel at 12:24 A.M. SGT on Wednesday.
Venezuela and Iran
Goldman forecast that Venezuela production would decline by around 10 percent every quarter, with “no clear catalyst for output to stabilize let alone increase.” It noted that production there has reached its lowest level for as long as Goldman as data, or in 35 years.
The investment bank also said it expected Iranian exports would decline 20 percent every six months starting in the third quarter of this year, despite the remaining signatories of the Iran nuclear deal trying to preserve the pact. That’s because fear of U.S. sanctions is reportedly spurring refiners to avoid Iranian crude, it said.
While shale oil production in the U.S. has typically picked up to squash any price increases in crude, Goldman said it didn’t expect the supply boost would be sufficient this time.
“Higher prices have led to a large shale response although pipeline congestion will slow down U.S. production growth rates until 2020, as the short-cycle nature of shale drilling catches up to the long-cycle of pipeline construction,” it said.