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Goldman Sees Limited Upside for Oil Prices Despite Rising Geopolitical Risk

Goldman Sachs analysts have brushed off the latest events between Iran and Israel as a bullish factor for oil prices, citing potential hedging by producers.

“Our commodities strategists do not expect substantial further upside to oil prices,” the bank said, as quoted by FXStreet, adding that “Hedge funds continued selling US Energy stocks for the 3rd straight week, and the sector has now been net sold in 5 of the last 6 weeks.”

One potential reason for this selling streak may be the strong performance of these energy stocks, which drove the S&P 500 energy index up by 17% since the start of the year, doubling the year-to-date return rate, as Reuters reported last week. This strong energy stock performance, in turn, was in part driven by the 20% increase in oil prices since the start of 2024.

"Any rise in oil prices on higher geopolitical risks may be dampened by oil producers deciding to hedge their price risks and sell forward their production," Goldman analysts also said.

However, it seems hedging is losing its attraction for many. Last year, hedging among U.S. producers fell substantially, possibly reflecting a changing attitude to the practice that has been popular for decades, despite the inherent risk of losing out on rallies.

What’s more, the consolidation drive in U.S. oil is leading to a reduction in hedging activity, as Bloomberg reported last year, with integrated buyers using their own operations to hedge against price volatility rather than locking in future prices for their upstream production as the independents they acquired did as standard practice.

Hedging might be also riskier than before in light of the latest developments between Iran and Israel. An Israeli retaliatory strike on Iran would certainly push oil prices even higher given the country’s standing as the fourth-largest OPEC producer. If the situation escalates further from there, all bets are off and Brent may well hit $100.

By Irina Slav for Oilprice.com

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