Few could have predicted that after an already big bull run this year against a backdrop of recovering demand, oil prices still had a long way to go. And yet, the world’s most traded commodity has just received a major boost from the gas crisis in Europe and Asia, prompting forecasters to update their forecasts. One of the more bullish observers has been Goldman Sachs, whose commodities analysts stuck to their $ 80 price target for Brent raw regardless of the resurgence of Covid-19 in many key markets and other bearish events. Now these analysts have raised their target to $ 90, arguing that oil has entered a structural bull market.
In a note released earlier this week, Goldman’s commodities team noted that the significant drops in oil inventories, which currently stand at around 4.5 million bpd and are the largest daily drops ever recorded, are one of the factors behind the transition from a cycle to a structural market.
Defined as a market – bearish or bullish – driven by factors such as fundamental imbalances and financial bubbles, the structural oil bull market was also strongly affected by the loss of US oil production caused by Hurricane Ida. With a certain 30 million barrels in total estimated production losses, Ida became not only one of the most devastating hurricanes in recent history, but one of the main reasons for the acceleration of OPEC + production since July of this year will not make the difference in the global supply.
In fact, the International Energy Agency reported earlier that due to Hurricane Ida, the world oil supply actually fell in August, despite OPEC + accelerations, by 540,000 b / d. The IEA added that it expects production growth to pick up again next month, but according to Goldman Sachs, this will be far from enough to restore the balance between supply and demand.
Investment bank commodities analysts now expect Brent crude to hit $ 90 by the end of the year, as demand for oil picks up amid the pickup in travel. The recovery, analysts say, will be driven by lower infection rates in the latest wave of Covid-19, which is proof that vaccination is working and that a return to normal life can again be achieved .
This is not what the average news consumer would gain by browsing the reports related to Covid-19, but the continued increase in demand for oil suggests that these reports only show part of the picture, and the other party is not so pessimistic.
Finally, there is the bonus upside factor for oil: the gas crunch that has crippled Europe and is starting to cripple China as well. Related: How To Play The Oil And Gas Bull Run
A combination of underinvestment in local production, increased demand as economic activity rebounded and a harsh winter last year that left storage caves half empty has turned into a perfect storm for Europe earlier this year and spiked gas prices to new heights, prompting utilities to reboot coal and petroleum power stations. China, on the other hand, is suffering from the effects of a tight supply of coal and self-imposed stricter emissions regulations that have raised energy costs.
All of this will lead to a persistent deficit for the oil markets, Goldman analysts noted. In addition, “its magnitude will exceed both the will and the capacity of OPEC + to scale up.” A recovery in the US shale will also be insufficient to wipe out the deficit, analysts noted.
This essentially means that oil will stay higher for longer – a scenario that would have been unlikely at best a few months ago despite the recovery in demand due to the focus on renewables and their role in permanent phase-out. of oil demand. Now, to add insult to injury, coal prices are also skyrocketing as European utilities brace for declining renewable energy production during the winter.
By Irina Slav for Oil Octobers