GS still says Brent needs to average $135 for 12 months

[dan_s]

Goldman Sachs says higher oil prices are only way to balances this undersupplied global oil market.

Turning exclusively to oil, Currie writes that the recent sharp sell-off in crude oil prices has been driven by growing recession fears in the face of low trading liquidity, with technicals exacerbating the sell-off. Doing some math, the Goldman commodities team writes that "the declines in prices and refining margins since mid-June are now equivalent to the oil market pricing in a 1.1% downward revision to 2H22-2023 global GDP growth expectations." Goldman believes this move has overshot, and while risks of a future recession are growing, the key to Goldman's bullish view is that "the current oil deficit remains unresolved, with demand destruction through high prices the only solver left as still declining inventories approach critically low levels."

Additionally, and as Goldman has explained in the past, the bank continues to see the oil market in a structural deficit that requires still higher prices to rebalance. Indeed, the oil market remained tighter than we had expected, reducing global inventories, after a record drawdown of 1350 million bbls to levels that were significantly lower than Goldman had previously expected. This more than offset the recent April-May surplus, the first after a record-long 23 months of deficits. This shift to surplus was driven by lower Chinese demand, record large SPR releases and a smaller-than-expected decline in Russian exports.

Notably, Goldman calculates that this surplus has now already come to an end, as the rebound in Chinese demand more than offsets the resilience in Russian exports, pushing inventories to historical new record lows. This deficit will likely persist at current oil prices given the expected moderate recovery in Chinese demand and declines in Russian exports (amid EU sanctions). While Goldman remains cautious on both, it expects the decline in Russian exports to accelerate from 0.3 mb/d to reach 1.5 mb/d by 1Q23 (versus 4Q21) given the logistical difficulties of now having to re-route nearly 5 mb/d of Western exports.

On the demand side, the negative global economic growth impulse remains insufficient to rebalance inventories at current prices while supply remains inelastic to prices – especially for shale – given investor and logistical bottlenecks. True, there will be higher core-OPEC supply later this year but this is mostly offset by the lack of progress on returning to the Iran Nuclear deal.

On net, even with Goldman's cautious assumptions on China/Russia, the bank calculates that "oil prices need to rally further to normalize the unsustainably low levels of global oil inventories, as well as OPEC and refining spare capacities."

Conclusion: As such, based on the bank's latest supply and demand expectations, Goldman forecasts that Brent prices will need to average $135/bbl in 2H22-1H23 for inventories to finally normalize by late 2023, "the binding constraint to prices in our view."