One of the biggest investment banks is one of the most bullish voices in predicting the state of the oil market next year. Goldman Sachs is more optimistic about the speed of the oil market rebalancing than many experts and other banks, and OPEC itself.
Goldman Sachs expects that the global oil overhang will have cleared by the middle of 2018, accelerating OPEC’s exit from the production cut pact that is currently set to expire at the end of 2018.
“The oil re-balancing continued its progress through November,” thanks to factors including “stellar” oil demand growth, Goldman Sachs analysts said in a note this week, as carried by Bloomberg.
“Global inventories will have re-balanced by mid-2018, leading to a gradual exit from the cuts,” Goldman’s analysts noted.
The U.S. investment bank also expects backwardation—the market structure of near-term oil futures trading at a premium to longer-dated contracts—to strengthen in the second quarter of 2018 when OECD oil inventories will drop to their five-year average.
Backwardation, a sign of a tighter oil market, was one of OPEC’s goals in the production cut deal.
Commercial oil stocks in the OECD fell further in November, and the difference to the latest five-year average has been reduced by around 200 million barrels since the beginning of 2017, OPEC Secretary General Mohammad Barkindo said last week. And this week, OPEC and its non-OPEC partners in the deal boasted “an impressive highest conformity level of 122 per cent.”
However, even OPEC is less optimistic than Goldman about the oil market rebalancing by mid-2018. In its Monthly Oil Market Report, OPEC said last week that it expects excess global inventories to arrive “at a balanced market by late 2018.”
Just two days before OPEC and allies agreed to extend the production cut pact to the end of 2018, Goldman Sachs had warned that a deal is far from certain. But after OPEC announced the extension, Goldman revised up its oil price forecasts for 2018, to $62 from $58 a barrel for Brent, and to $57.50 from $55 a barrel for WTI.
The production cut pact “leaves room for an earlier exit than currently scheduled, we now reflect this resolve in our supply forecast, with full compliance for longer and a more modest exit rate,” Goldman said at the beginning of December.
At the end of December, the bank continues to believe that there may be an early exit from the cuts, and kept its $62 per barrel Brent forecast for 2018.
Goldman is one of the most bullish of the biggest banks. JPMorgan is also among the bulls, citing “solid fundamentals and tightening balances.” Citigroup and Barclays, however, are not that optimistic, and say that rising U.S. shale production could undo the current market optimism.
Unplanned temporary outages such as the Forties Pipeline shutdown are currently supporting oil prices, but as we go into 2018 a lot of those temporary issues will go away and supply is going to exceed demand again and inventories will build, Michael Cohen, Head of Energy Markets Research at Barclays, said earlier this week.
Goldman Sachs may expect that OPEC/non-OPEC could exit from the deal earlier than planned, but OPEC and its partners have not communicated any exit strategy from the deal, yet.
A couple of days after the producers agreed to extend the cuts, Saudi Arabia’s Energy Minister Khalid al-Falih said that “We think that the outlook for when we will hit the balanced market will be clearer in June, and we will start thinking of what do we do in 2019.”
Now OPEC is said to have started to work on a kind of exit strategy, or rather, a “continuity strategy”, according to an OPEC source who spoke to Reuters.
OPEC doesn’t expect significant drawdowns in oil inventories in the first quarter of 2018, just like in 2017, al-Falih has said, and the message from OPEC is that we’ll have a clearer picture by June.
Goldman, on the other hand, expects the second quarter to see significant drawdowns if we are to reach a balanced oil market by the middle of 2018.
Global oil demand growth probably needs to be exceptionally “stellar” in the first half next year, if Goldman is to guess the timing of the rebalancing of the market right.
By Tsvetana Paraskova for Oilprice.com