Few could have predicted that after an already extensive bull run this year amid recovering demand, oil prices had much further to go. And yet, the world’s most traded commodity just got a major boost from the gas crunch in Europe and Asia, prompting forecasters to update their forecasts. One of the most bullish of all observers has been Goldman Sachs, whose commodity analysts have stuck to their price target of $80 for Brent crude regardless of the resurgence of Covid-19 in many key markets and other bearish events. Now, these analysts have raised their target to $90, arguing that oil has entered a structural bull market.
In a note from earlier this week, the Goldman commodities team noted the sizeable drawdowns in oil stocks, which currently stand at around 4.5 million bpd and which are the biggest daily drawdowns ever recorded, are one of the factors driving the shift from a cyclical to a structural market.
Defined as a market - bearish or bullish - that is driven by factors such as fundamental imbalances and financial bubbles, the structural bull market for oil was also affected significantly by the loss of U.S. oil production caused by Hurricane Ida. With some 30 million barrels in total estimated production losses, Ida has become not only one of the most devastating hurricanes in recent history but one of the main reasons that OPEC+ production ramp-ups since July this year will fail to make a difference to world supply.
In fact, the International Energy Agency reported earlier that because of Hurricane Ida, global oil supply actually fell in August, despite OPEC+ ramp-ups, by 540,000 bpd. The IEA added it expected production growth to resume next month, but according to Goldman Sachs, this will be nowhere near enough to restore the balance between supply and demand.
The investment bank’s commodity analysts now expect Brent crude to hit $90 by the end of the year as demand for oil recovers amid the recovery in travel. The recovery, according to the analysts, will be driven by lower infection rates during the latest Covid-19 wave, which is proof that vaccination works and a return to normal life may be attainable once again.
This is not what the average consumer of news would gather from browsing Covid-19 related reports, but the continued increase in oil demand suggests those reports only show part of the picture, and the other part is not all that pessimistic.
Finally, there is the bonus bullish factor for oil: the gas crunch that has crippled Europe and is beginning to cripple China as well. Related: How To Play The Oil And Gas Bull Run
A combination of underinvestment in local production, a jump in demand as economic activity rebounded, and a harsh winter last year that left storage caverns half-empty turned into a perfect storm for Europe earlier this year and pushed gas prices sky-high, prompting utilities to restart coal and oil power plants. China, on the other hand, is suffering the effects of tight coal supply and self-imposed stricter emission regulations that have added to energy costs.
All this will drive a persistent deficit for oil markets, the Goldman analysts noted. Further, “its scale will overwhelm both the willingness and ability for OPEC+ to ramp up.” A recovery in U.S. shale will also be insufficient to erase the deficit, the analysts noted.
This basically means oil will remain higher for longer - a scenario that would have been unlikely at best a few months ago despite the recovering demand because of the focus on renewables and their role in killing oil demand permanently. Now, to add insult to injury, coal prices are also soaring as European utilities stock up to be prepared for the drop in renewable generation during the winter.
By Irina Slav for Oilprice.com
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The fundaments are now robust enough to overwhelm any remaining pandemic cases worldwide and support a higher trajectory for oil prices helped by a growing deficit in the global oil market.
The EU’s rash policies to accelerate energy transition at the expense of fossil fuels and the incessant pressure by environmental activists and divestment campaigners on the global oil industry particularly the European oil supermajors to divest of their oil and gas assets have adversely affected production and investments without affecting the global oil demand for them thus creating a widening oil supply deficit and skyrocketing oil prices.
OPEC+’s role is to balance the market to ensure that it doesn’t dip into a deficit or a glut. And despite being the most influential player in the global oil market, OPEC+’s ability to prevent a deficit in the market is being undermined by declining investments in oil and gas production. Furthermore, huge deep production cuts by OPEC+ like the ones implemented in 2020 are no longer acceptable to its members.
Therefore, OPEC+ can neither stop the oil price rally nor would it want the Brent crude price to fall below $80 a barrel which is the price the overwhelming majority of its members with the exception of Russia need as a minimum to balance their budgets.
Against this background, the oil price rally will take Brent higher than $80, probably to $85 before the end of the year.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Not only were they wrong, they were way off the mark.
The oil industry has a strong bright future.