- Goldman Sachs said it was still bullish on oil, but cut its price target for Brent crude to $100 a barrel from $125.
- A rising U.S. dollar and weakening global demand are headwinds to oil prices, a note said.
- But low levels of investment, spare capacity and inventories point to tailwinds on the supply side.
Goldman Sachs has lowered its forecast for oil prices as demand falls and the U.S. dollar strengthens, according to a note released Tuesday.
Chinese demand in particular will weigh on oil prices, and the bank expects China’s reopening of zero-COVID policies not to occur until next summer, leaving 2023 oil demand stable relative to in the fourth quarter of this year.
Analysts now see Brent crude averaging $100 a barrel from October through December and $108 a barrel in 2023. That’s down from a previous target of $125 for both periods. On Friday, Brent was trading around $88 a barrel.
Yet Goldman remains broadly bullish and considers the recent “investor exodus” that assessed a Great Recession for crude to be overblown: “We believe lower oil prices have outweighed downside risks to global oil demand. “.
Several tailwinds on the supply side are bolstering the bank’s confidence in oil’s recovery, with investment, spare capacity and inventories all low.
Meanwhile, the Biden administration’s releases of the Strategic Petroleum Reserve will end this fall, and the European Union’s embargo on imports of Russian oil by sea will come into effect by December, tightening more about the supply situation.
And even under Goldman’s weaker demand forecast, the current oil price is supported by the supply outlook, as Russian oil production would need to increase to 12 million barrels per day, which is an “outlook impossible” due to its recent decline and escalation in the Ukraine war. In August, production was just over 10.5 million barrels per day.
“While we recognize that the near-term price path is likely to remain volatile, with the USD in command (opposite), we find that our belief in the long-term bullish view is only reinforced by the current disappointments in the market. ‘global supply,’ the note says.
Oil prices have fallen in recent months as central banks tighten monetary policy to tame inflation and China keeps demand on the sidelines due to COVID-19-related lockdowns.
The Federal Reserve’s aggressive rate hikes also took the dollar to 20-year highs. And since most oil contracts are denominated in dollars, a rising greenback makes crude more expensive for international buyers and weakens demand.
“A strong U.S. dollar and falling demand expectations will remain powerful headwinds for prices through year-end,” the note said. “Yet the structural pattern of bullish supply – due to lack of investment, low spare capacity and inventories – has only strengthened, inevitably necessitating much higher prices.”