Goldman Sach’s commodity guru Damien Courvalin in a note titled “A Drop in the Ocean” says details of government crude reserve releases , with 50 million barrels (mb) from the US and as much as 30 mb from Korea, Japan, China, India and the UK, is smaller than the market had been pricing in.
After the announcement, Brent crude leapt 3.50% higher, finishing at $82.25 a barrel. WTI also jumped 2.65% higher, closing at $78.50 a barrel.
“The aggregate size of the release of c. 70-80 mb was both smaller than the 100+ mb the market had been pricing in, with the swap nature of most of these barrels implying an even smaller c. 40 mb net increase in oil supplies over 2022-23,” Courvalin said.
That, as Courvalin points out, is in the context of a market drawing up to 2mb/d at present!
Translation: enjoy the low oil and gas prices while you can… we are going much higher.
How much higher? As Courvalin explains, on his pricing model, such a release would be worth less than $2/bbl, significantly less than the $8/bbl sell-off that occurred since late October.
So at $82/bbl currently, Brent prices are in fact not only pricing in announced release, but an additional hit to global oil demand of 1.5 mb/d for the next three months.
That is equivalent to pricing in both a repeat of last winter’s 1 mb/d hit to EU oil demand due to the COVID wave (which occurred in the absence of vaccinations) as well as a repeat of this summer’s 0.5 mb/d hit to Chinese demand from lockdowns.
Separately, while Goldman concedes that on their own, the coordinated government stock releases would warrant a $2/bbl downgrade to the bank’s $90 year-end Brent price forecast, it sees offsetting risks from the lack of progress on negotiations with Iran.
In conclusion, Courvalin reiterates his view that such government intervention is not the solution to higher oil prices that are required to overcome the slow supply response of producers.