What is the "Right Price" for oil? - May 24

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What is the "Right Price" for oil? - May 24

Post by dan_s »

I recently spoke at conferences in San Diego and Dallas. During each presentation I gave my opinion that oil prices today don't reflect the current tightness in the physical market or the predictions from IEA that oil demand will be increasing by another 2 to 3 million barrels per day over the next six months. When asked for my "guess" on where the oil price will be for the rest of this year, I told them that I was using WTI prices of $80/bbl for Q3 and $90/bbl for Q4 and I said it might go over $100 assuming we don't have a Major Global Recession.

Here is what Goldman Sachs is telling their clients.

- The commodities' research team at Goldman Sachs doesn't just
like oil. They believe that an investment in the broad S&P GSCI index (which
includes futures contracts for energy, metals, and grains) will return over
30% in the next twelve months.

The investment house characterizes all commodities as moving recently through
an "unprecedented physical de-stocking." Analysts pay heed to the selling in
paper markets but also believe that heavy physical selling has been coupled
with expectations of a broad recession.

The bank does acknowledge recessionary risk but puts the probability at only
about 35%. The team believes that physical markets for commodities are
reflecting a view appropriate for a 55% risk.

No new oil price targets are in the research report sent to clients yesterday. < GS's current forecast is still that Brent will average $95 in Q4.

But Goldman believes that strategic stocks of oil in French, Chinese and U.S.
coffers are down 250 million barrels this year. Meanwhile, net positioning in
crude oil is as short as it was during COVID, when inventories screamed higher
and capacity constraints were breached.

The bank admits that its ambitious price targets for Brent crude ($95/bbl by
year's end and $100/bbl next spring) seem off the mark but believe that
worries over the health of the financial sector, debt ceiling risks, and
overall fear of recession have brought markets to this point. Commodities are
a "great hedge" analysts suggest.

For oil, Goldman senses that the fundamentals justify prices that are
$10-$15/bbl higher than current numbers. The catalyst for a surge may come via
an easing of inflationary fears or a strong rebound in Chinese manufacturing.

The investment house highlights International Energy Agency prognostications
which have seen demand growth tweaked higher in every month since last

Plentiful Russian production and exports are acknowledged, and indeed Goldman
believes that Russian oil has surprised to the tune of 2 million barrels more
petroleum than was predicted last year. But the bank also believes that OPEC+
has been largely compliant with pledged May cutbacks.

It's not just oil that should move higher over the next 12 months, according
to the report. Current low prices for natural gas should combine with
restocking and above-consensus economic activity to require higher prices
later this year.

China will probably need more LNG imports for industrial consumption and leave
fewer cargoes available for Europe.

This content was created by Oil Price Information Service, which is operated
by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The
Wall Street Journal.
Dan Steffens
Energy Prospectus Group
Posts: 3095
Joined: Mon Mar 22, 2021 11:48 am

Re: What is the "Right Price" for oil? - May 24

Post by Fraser921 »

I agree with the sentiments.

If you want to play this directly, the JAN 2024 WTI contract is going for 72.24 a bbl as of 5/24.

Energy is trading like there is a huge recession coming but Technology (see NVIDA) is trading like a soft landing or outright bull market in play
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