Just a speed limit? Oil has jumped, but Goldman is still bullish


Pump jacks work in front of an oil rig in an oil field in Midland, Texas.

Nick Oxford | Reuters

A panic sell-off in the oil market sparked by virus worries has challenged the commodity’s uptrend – but Goldman Sachs energy experts don’t appear to be shaken.

Fears about the swelling delta coronavirus variant and a new agreement to increase supply by OPEC + caused oil prices to collapse by more than 7% at the beginning of the trading week on Monday.

The decline was the steepest since March, a rude awakening for oil bulls, who had enjoyed the highest commodity prices in 2½ years.

The international benchmark Brent crude oil traded at $ 68.42 a barrel on Tuesday at 2:15 p.m. in London, just over 7% lower than Friday’s closing price of $ 73.59 a barrel.

Oil analysts were quick to stress the uncertain path of demand as new waves of Covid-19 infections – many in communities with high vaccination rates – threaten the final months of the economic recovery.

“The market is clearly unsettled about the demand outlook. And rightly so. The rise in delta variant cases raises questions about the sustainability of demand, ”wrote Stephen Brennock, senior analyst at PVM Oil Associates in London, in a research note on Tuesday entitled” Oil Needs a Spanking. “

However, Goldman Sachs analysts, led by Senior Commodity Strategist Damien Courvalin, see the current setback only as a brake wave, without the oil bulls worrying.

Supply drives the cops?

Oil balances around the world are tighter than ever, despite the weekend agreement between OPEC and its allies to cumulatively increase crude oil production by 400,000 barrels per day on a monthly basis starting in August.

The International Energy Agency estimated a deficit of 1.5 million barrels per day for the second half of this year compared to its demand forecasts in the absence of an OPEC supply contract.

And Goldman predicts the Delta impact will be near “a potential hit of 1 mb / d (million barrels per day) for just a few months, and even less if vaccines prove effective, hospitalizations in DMs ( Developing markets). The source of most improvements in summer demand, “its latest report said.

Goldman’s call is in line with his previously bullish stance that Brent is forecasting $ 80 a barrel for the second half of this year.

The optimistic recovery prospects, coupled with a “slower” production ramp-up than expected by OPEC and a tighter supply, mean so far that “our constructive view on oil prices remains intact”. But the short-term slump in demand from Delta fears sparked a shift in the lender’s quarterly forecasts: He now expects Brent to average $ 75 a barrel in the third quarter of this year and not hit $ 80 until the fourth quarter.

“Oil prices could fluctuate wildly in the coming weeks given the uncertainties of the delta variant and the slow development of the supply trend,” wrote the analysts at Goldman.

Nonetheless, they continued, “We believe that the revaluation of the oil market to higher equilibrium is far from over as the upward momentum shifts from the demand to the supply side.”

The China factor

A less discussed factor in the future demand picture is the world’s largest oil customer: China. The recovery of the planet’s second largest economy is showing signs of losing momentum, which would take a big blow to crude oil.

China’s crude oil imports were down 2% month-on-month in May and their lowest monthly volume since the start of the year, according to PVM Associates, falling to 9.77 million barrels a day. In July, they fell further to 9.55 million barrels a day, according to Refinitiv Oil Research. The country’s imports in the first half of 2021 fell 3% from the same period in 2020, the first drop in that level since 2013.

“China’s latest GDP data suggests the country’s V-shaped economic recovery is cooling off from Covid-19,” PVM’s Brennock wrote. “More worryingly, the latest Chinese customs data is giving the market some mixed signals pointing on the bearish side.”

The combination of uncertain demand due to the delta variant, cooling import volumes from China and the reintroduction of supplies from OPEC and its allies, known as OPEC +, indicate declining signals to the market. But how long the uncertainty will last and whether national vaccination campaigns can offset the mutating virus will ultimately determine the demand picture. In the meantime, the supply dynamic, especially the current shortage of stocks, continues to give the oil bulls some fuel.

“Questions are being asked as to whether the recently announced increase in OPEC + supply will overwhelm the recovery in demand,” Brennock wrote. “At present, this seems unlikely, although evidence from the world’s largest oil-importing nation seems to support the bearish narrative.”