Goldman: Expect Another Bull Run In Oil


By Nick Cunningham

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 de?cit 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 re?ecting 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.

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 ?nd another destination other than China.”

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.


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