Goldman Sachs cuts oil price forecasts on strong crude supply and weak demand

Russian exports have nearly 'full recovered' despite western price caps, investment bank says

A well head and drilling rig in the Yarakta oilfield in Russia's Irkutsk region. Reuters

Oil prices fell on Monday after Goldman Sachs reduced its oil price forecasts, citing stronger-than-expected supply and weak economic growth in top crude importer China.

The investment bank expects Brent crude, the benchmark for two thirds of the world’s oil, to trade at an average of $86 a barrel in December, down from its previous estimate of $95.

It also lowered the Brent forecast for May 2024 to $93, from $100.

Brent was trading 2.43 per cent lower at $72.97 a barrel at 1.42 pm UAE time while WTI, the gauge that tracks US crude, was down 2.47 per cent at $68.25 a barrel.

Opec+ cuts will reduce pressure on long-term oil prices by increasing spare capacity, which is projected to rise by 2.5 million barrels per day annually in the third quarter of this year, Goldman Sachs said in a research note on Sunday.

The requirement for a smaller future supply growth enables the market to fund more competitive projects at a slightly lower oil cost curve, Goldman Sachs said.

“Oil prices are down $10 per barrel over the past two months despite last week's announcement that Saudi Arabia will deliver an extra extendable production cut as significant supply beats from Iran and Russia have driven speculative positioning to near record-lows,” the bank said.

On June 4, top crude exporter Saudi Arabia announced an output cut of a million bpd for July and said it could be extended depending on market conditions.

Goldman Sachs said the full reduction may last for three months before being halved to 500,000 bpd from October 2023.

At that point, an oil market deficit of more than 2 million bpd could have pushed oil prices to the “low-to-mid $80s”, the bank said.

Meanwhile, the Opec+ group of 23 oil-producing countries will stick to current production cuts until the end of 2024 as concerns about the global economy weigh on the outlook for crude demand.

The group has total production curbs of 3.66 million bpd, or about 3.7 per cent of global demand, in place, including a 2 million bpd reduction agreed on last year and voluntary cuts of 1.66 million bpd announced in April.

Goldman Sachs said its forecast cut was also driven by higher-than-expected supply from producers facing western sanctions, including Russia, Iran and Venezuela.

Moscow’s oil exports have nearly “full recovered” despite western price caps and the decision by many companies to stop buying crude barrels from the country, the bank said.

Russian oil exports hit 8.3 million bpd in April, the highest since Moscow’s invasion of Ukraine last year, the International Energy Agency said in a report last month.

“The fight against inflation may have been associated with changes in sanctions enforcement, and previously constrained productive capacity has been unlocked,” the bank said.

Goldman Sachs also lowered its oil demand forecasts for Europe, Japan, South Korea and China, citing weak petrochemical demand.

The IEA has predicted that global crude demand will hit record levels this year on the back of an economic recovery in China.

However, economic growth in the Asian country has been largely uneven since it lifted Covid-19 restrictions earlier this year.

Investors are also keeping an eye on the US Federal Reserve's interest rate decision scheduled for tomorrow.

The recent debt ceiling deal in the US and positive economic data have lifted hopes that the Fed will pause its rate increase programme next week.

"If there is no major surprise on the inflation data front, the Fed should keep the interest rates unchanged at this week’s policy meeting," said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

"But that doesn’t mean that the Fed is done hiking. Whatever pause we might see this week will come with a hawkish accompanying statement, and a threat that the Fed could resume its rate hikes next meeting."

Higher interest rates could slow the global economy and dampen crude demand.