New York January 18 2022:
Goldman Sachs updated demand and supply elasticities, they model this rebalancing will require long-dated prices rising to $90/bbl, bringing their Brent spot forecast to$105/bbl in 2023 (with 2022 at $96/bbl).
At such prices, they estimate that therebalancing will be achieved through 0.6 mb/d of demand reduction, although tostill record high and above consensus levels, with shale growing 0.8 mb/d YoY in 2023.
Robust fundamentals have reversed last year’s oil price melt-down, with themarket remaining in a surprisingly large deficit as the Omicron demand hit is sofar smaller (and likely briefer) than that of Delta exc. China. While the hit toChinese demand will be large due to its zero-Covid policy (-0.5 mb/d in 1H22), they see it offset by strong demand in 4Q21, gas-to-oil substitution and supply
disappointments. Net, they expect inventory draws to narrow but persist through 1Q22, with the global surplus in 2Q22 smaller than seasonal at 0.4 mb/d (we are pushing their Iran ramp-up to 2Q23 given the lack of progress on negotiations).
By summer, this will bring OECD inventories to their lowest level since 2000 alongside a decline in OPEC+ spare capacity to historically low levels of c.1.2mb/d. At $85/bbl, the market would remain at such critical levels, insufficientbuffers relative to demand and supply volatilities, through 2023. As the sixprecedents since 1990 invariably show, consumers attempting to secure physicalsupply will first drive backwardation steeper, at which point the unwind of producer hedges and consumer forward buying will lead long-dated priceshigher, normalizing inventories and spare capacity through the combination ofdemand destruction and higher supply.
Goldman Sachs believe the market needs to solve for this once again, with this prospect of long-term shortages leading to near-termsurpluses.
They are positioned for such a rebalancing process through their long Brent Dec-22 vs. Dec-23 and long Dec-23 Brent trade recommendations.
Importantly, they are not forecasting Brent trading above $100/bbl on an argument of running out of oil as the shale resources is still large and elastic. This mechanism will, however, likely require ever rising oil prices given the reluctanceto invest in oil during the energy transition and the gradual depletion of shale’sgeological, midstream and service capacities.
