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Oil prices may be dropping, but oil is still headed for $140 per barrel, Goldman Sachs told CNBC on Thursday, and could even hit $140 in the face of a recession.
“$140 is still our base case because, unlike equity, which are anticipatory assets, commodities need to solve for today’s mismatched supply and demand,” energy analyst Damien Courvalin said, who compared today’s market to the recession in 2008.
At that time, oil prices rallied even during the first six months of the market downturn, bolstered by tight supplies as inventories continued to draw down, Courvalin explained. Eventually, oil prices were dragged down by the slowing economy. Goldman sees that happening again, even if we are headed for a recession—at least at the start of a recession.
Robust demand and a tight market this time around is compounded by years of underinvestment in oil exploration, creating this long-term supply issue that is immune to any speedy remedy. Goldman still sees Brent sinking to $85 if GDP growth outside China reaches zero, but tight crude oil supplies should put a floor under the price slide.
Goldman’s predictions for $140 oil as its base case comes even as crude oil prices slid this week, and even as some fear a recession. WTI and Brent crude rallied on Thursday, managing to regain ground that was lost earlier in the week that saw both benchmarks break below $100 per barrel. The market fundamentally remains tight, but temporary factors including China’s recently announced plan to consider a $220 billion stimulus with bond sales and fears of a recession have swung oil wildly this week.
By Thursday afternoon, both benchmarks had made significant gains. WTI was trading up 4.23% to $102.70, with Brent crude trading up 3.95% to $104.70 per barrel.
“This is an environment where we need a decade of investment ahead,” the Goldman analyst told CNBC.
By Julianne Geiger for Oilprice.com
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Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.
Neither capping the price of Russian crude oil exports nor demand destruction even in a harsh recession will cause prices to decline in the continued presence of underinvestment in production capacity expansion.
The answer to continued rising oil prices isn’t going to be found in Saudi Arabia or UAE. It will only happen when the world tackles underinvestment. This means investing up to $600 bn annually for the next 10 years to expand both production and refining capacities.
In a nutshell, high crude oil prices are here to stay until the fruition of global investments in five years from now.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London