Late on Monday, Goldman Sachs published a report in which it again revised its oil price outlook (higher), saying that structural shortages remain unresolved to this day, despite a brief period in which the oil market enjoyed its first surplus since June 2020.
The Wall Street Investment Bank added that it was raising its peak summer oil price target from $125 to $140, while also hiking it oil prices targets for the rest of 2022 and 2022 by $10 higher than before.
As Goldman’s Damien Courvalin writes in the note, with fundamentals weakening in April-May, due to modest declines in Russian exports, record large Strategic Petroleum Reserve (SPR) sales and severe Chinese lockdowns, the oil market to saw its first surplus since June 2020.
However, this politically created surplus is already ending , driven by the ongoing recovery in Chinese demand.
As such, oil’s structural deficit remains unresolved, with in fact an even tighter oil market through April than the Goldman analyst had expected.
Supply remains inelastic to higher prices with core-OPEC (higher) and exempt countries (lower) production shifts broadly offsetting.
On the demand side, the negative global growth impulse remains insufficient to rebalance inventories at current prices.
As a result, Goldman believes 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.
Warning that with structural shortages unresolved, Courvalin writes that the rising long-term shortages will require near-term surpluses, and that given both record low inventories and OPEC spare capacity, “the market will solve to balance in the short-term and recreate the necessary buffers in the coming year.”
Forcing the market to balance in the short-run and create excess inventories next year therefore requires a higher oil price forecast over both periods.
Based on Goldman’s estimated 3% demand elasticity and bottom-up estimated shale elasticity, as well as accounting for the retail vs. Brent price disconnect, the bank forecasts that oil prices will need to average $135/bbl in 2H22 and $125/bbl in 2023, $10/bbl higher than previously.
On a monthly basis, this points to a peak summer Brent price of $140/bbl with Goldman’s consumer Brent price expected to reach over $160/bbl.