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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Goldman: Expect Another Bull Run In Oil

PKN orlen refinery

The expected increase in oil production will not leave the market in a situation of oversupply, and in fact, barring no further action, the world could still be short of oil over the next year.

There is no shortage of pitfalls for the bull run, with Trump’s expanding trade war, weaker demand and a potential currency crisis in emerging markets, and the drilling frenzy so far proceeding at an unabated pace in West Texas.

Even with those considerations, however, “the oil market remains in deficit with resilient demand growth and rising disruptions requiring higher core OPEC and Russia production to avoid a stock-out by year-end,” Goldman Sachs wrote in a note on Monday.

The conclusion is notable because the investment bank assumes a rather aggressive increase in supply from OPEC+, on the order of 1 million barrels per day (mb/d) in the second half of 2018. Goldman says that the disruptions elsewhere, including in Venezuela, Iran and Libya, might mean that the decision to increase by 1 mb/d only actually results in a net addition of around 450,000 bpd.

Moreover, the recent downturn in prices does lessen the chance of a price spike, but the Goldman says the oil market is “still in deficit, with the recent builds reflecting a transient slowdown in Chinese imports.”

Therefore, the expected increase in OPEC+ production is needed, and won’t spark a market meltdown. The bottom is falling out in Venezuela and a long list of companies are packing up and getting out of Iran. Ultimately, Iran might see a sizable chunk of its oil exports disrupted because of U.S. sanctions. Libya and Nigeria are also in the midst of another wave of supply disruptions. Related: LNG Spot Prices In Asia Spike To Four-Year Highs

Most forecasts bake in a massive increase in U.S. shale production, an almost assumed outcome based on the last few years of rapid growth. However, even though shale does continue to grow briskly, the pipeline bottlenecks in the Permian could force a slowdown. In a separate report, Goldman Sachs said that pipeline relief is more than a year away, and in the interim, trucks and trains won’t be able to resolve the midstream bottleneck. That could force much steeper discounts than the already very hefty discount that Midland crude is currently fetching.

The implications of a potential shale disappointment for the global market are profound. “A tight global oil market requires more shale production, yet the Permian will soon be unable to provide it,” Goldman wrote in its latest report. “As a result, we believe the oil market has moved up the shale cost curve to incentivize more drilling in other shale basins.”

On the demand side of the equation, Goldman is betting on a rather strong 1.75-mb/d increase, or several hundred thousand barrels per day higher than other leading forecasters, such as the IEA.

There are risks to this prediction. The implementation of $50 billion in U.S. tariffs on Chinese goods was met with quick retaliation from China. Most recently, President Trump directed his underlings to prepare an additional $200 billion in tariffs on China in what could be a dramatic escalation in the unfolding trade war.

Goldman Sachs is not too concerned about this cutting into oil demand growth, arguing that the fallout will likely be “minimal, with only a potential negative price impact on U.S. crude if it needs to find another destination other than China.” Related: Permian Discount Could Rise To $20 Per Barrel

Overall, the investment bank remains highly bullish on crude oil, and while there are plenty of sources of uncertainty, the outlook is based on two overarching arguments: the oil market is fundamentally in a supply deficit right now, and the forthcoming increase in OPEC+ production will be modest. Goldman said it would require a pretty severe economic slowdown to derail this general trajectory.

As such, the oil market will need more OPEC production in 2019 “to avoid historically tight stocks, as logistical constraints limit shale’s production growth.” That will help ease the immediate shortage, but “this supply response will further reduce the market’s available spare capacity, bringing back to the fore the upside risks to oil prices that prevailed a month ago.”

The upshot is that oil prices will remain “rangebound as OPEC initially increases production,” but oil prices could rise as the year wears on.

By Nick Cunningham of Oilprice.com

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  • Neil Dusseault on June 19 2018 said:
    Or, the price of WTI could go down...considering that the weekly draws API (and sometimes EIA) report are not large enough to keep inventory numbers at or below the 5-year average, compliments of U.S. shale.

    Folks, in the very short-term, WTI may actually rise closer to the upper-$72s/bbl (recent highs) due to speculation during and/or after the OPEC meeting on Friday. Iraq & Iran would be happy!

    But I do not expect it to reach new multi-year highs, but rather prices going lower than they have lately--even down close to $60/bbl before the end of 2018.

    This is because the Saudis and Russians want a piece of the market share that Venezuela and Libya (among others in the "Fragile Five").

    You want $75 to $80+ on WTI? Wait at least until 2019...if and when Aramco may have its IPO.
  • John Scior on June 20 2018 said:
    As of the current moment in time, we know the Federal Reserve is in the process of raising interest rates. This will continue the trend of capital flight away from emerging markets and increase the value of the dollar. The US economy will continue to grow while the rest of the world experiences a decline due to capital flight and the disappearance of cheap money. European demand is susceptible to a declining Euro, not only because of failure to raise interest rates by the ECB but also because the Euro is vulnerable to debtor nations within the Euro and the prospect for another Brexit like event. Or a Greece like crisis. We may in fact see European nations all forgo the Euro and re-adopt their own sovereign currency again. These factors combined equal an overall decline in world demand for oil, while at the same time create conditions where producers are desperate to achieve dollar denominated sales and thus cheating the production quota system.
  • Aquila on June 20 2018 said:
    Goldman Sachs has been too bullish on Oil & Gas prices! Their past predictions over the recent half decade have have always erred on the high side. Until Goldman Sachs explain where & how they went wrong, I think we can ignore this & future predictions by them on the O&G market!
  • Vishwas on June 20 2018 said:
    When will Goldman stop fooling people for fill his own pockets?
  • Phil Mirzoev on June 20 2018 said:
    There is not much, but still some possibility for a negative scenario for oil to play out, namely the possibility for China to experience a serious economic slowdown because of the trade war with the US, if (and that's a big if) the stand-off between the US and China really escalates into a full-blown trade war. Also, for this to happen, it should be assumed that China won't be able to effectively replace the export part of its economy with the internal demand fast enough.
  • William Iannucci on June 20 2018 said:
    Personal opion : You people screwed with us by lying ing the 70's and robbed us so tell me how is this any different? Come on now ! You knew this was going to happen when you guys got greedy in WALLSTREET , you know ! Were not all dumb. Just had to say how I feel before our right to even speak is being played. Lol
  • the masked avenger on June 22 2018 said:
    Now for a little truth. Oil continues in oversupply/glut. That will not change as auto/truck efficiency continues to rise. Alternative energy sources continue to grow at an exponential rate and chemical companies are finding alternatives to oil. Oil greed is the only driver in the oil markets. The lies that the days of oversupply is over are just that......lies. no one any longer is buying big oils lies and greed. Keep raising the price of oil and the alternatives just get better and cheaper. Even low oil won't stop that anymore. Screw me once, shame on you.....screw me twice....shame on me. Oil screwed all of us to long enough and is planning its own demise. Oil is the only greed that truly believes it can't be replaced while it is being replaced. Peak oil came and went. RIP oil, you deserve your demise
  • Jim on June 22 2018 said:
    I believe oil will go down. The glut has not disappeared. Ships are still being used as storage. Don't believe for a minute that all that oil was used up this quick. It wasn't. As time passes more electric cars, more hybrid vehicles and better technology allow for lower oil consumption.
  • Tony on June 25 2018 said:
    Strange, 2 years ago Goldman predict an Oil price of $10 !???

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