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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Goldman: Oil Markets To Balance Sooner Than Expected

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.” Related: U.S. Slaps Sanctions On Israeli Oil Billionaire

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. Related: Aramco’s “Acquisition Hit List”

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

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  • Johnny on December 23 2017 said:
    Goldman is consistent in predicting future oil prospects.So far they have not made mistake s in predictions.Just read what they said for 2017.
  • Clyde Boyd on December 24 2017 said:
    In other words market manipulation by oil traders has rebalanced the market.
  • df on December 26 2017 said:
    I remember when GS said Diamond Offshore was a conviction buy at $71. It is now $18.
  • John Brown on December 27 2017 said:
    Of course Goldman is predicting the glut of oil sloshing around the world will diminish as soon as it makes sense for them to make that prediction. Why? Guess who one of the biggest players in the oil markets is, and guess who makes more billions the higher the price of oil goes? Yep, you guessed right. Its is in Goldman's financial interest to be optimistic about when the glut of oil sloshing around will tighten up because that speculation helps drive the price of oil higher, or sustains it, and Goldman makes a lot of money the higher the price. The reality is that there is a glut of oil, OPEC/Russia have idled millions of barrels a day of production to drive the price up, and with that and the rest of the support industries and speculators doing everything in their power to drive up the price of oil they've succeeded in getting oil at or above $60 a barrel. The fact are though that with oil at $60 U.S. production will speed up and exceed all the current predictions, and the glut of oil will only grow. OPEC/Russia can continue to idle production, and a growing global economy would help, but nothing is going to change the reality that there is plenty of oil and gas available, and millions of barrels of production sitting on the sidelines with countries that may get tired of watching U.S. and other non-OPEC countries increase their production at record rates and get the benefits of $60 plus oil in a world where there is NO scarcity of oil or gas.

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