Oil prices could potentially rise as much as 12 per cent from current levels, though the rally may prove fleeting, according to Goldman Sachs Group Inc.
Top OPEC member Saudi Arabia is cutting output faster than U.S. shale drillers can fill the gap, leaving a void in the market that may push global benchmark Brent crude to US$70-$75 a barrel in the near future, bank analysts led by Jeffrey Currie said in a note. At the same time, supply disruptions in Venezuela are likely to accelerate in coming months, they wrote.
“The oil market will likely continue to tighten significantly this March and April,” Currie said. “While prices could easily trade in a US$70-$75 a barrel trading range, we believe such an environment would likely prove fleeting,” he said, reaffirming Goldman’s forecast for Brent to end the year at US$60.
Brent has rallied 25 per cent this year to around US$67 a barrel after a collapse of 35 per cent in the last quarter of 2018 as the Saudis spearheaded a plan by the Organization of Petroleum Exporting Countries and its allies to curb production. Signs the U.S. and China are moving closer to a trade deal have improved the demand outlook, with President Donald Trump saying over the weekend he’ll extend a deadline to raise tariffs on Chinese goods.
Saudi Arabia is guiding to March production around 500,000 barrels a day lower than its own quota, Currie said in the Feb. 25 note. At least 100,000 barrels a day of Venezuelan exports have been lost, and this could rise to a daily 200,000 to 300,000 barrels in coming months if there’s no political resolution, he said.
On the demand side, a surge in Chinese credit in January has eased fears of a slowdown in Asia’s biggest economy, the Federal Reserve is tilting dovish and consumption data from India, France and Italy points to stronger growth, Goldman said. That means there are few downsides to the bank’s forecast of about 1.45 million barrels a day of demand this year.
The fleeting period of elevated oil prices presents a window of opportunity for producers to sell long-dated futures and options in order to hedge prices in case of a drop later in the year, Currie said in the note. U.S. drillers had only 4 per cent of their 2020 output protected at the time they posted third quarter results, compared with a five-year average of 36 per cent, suggesting they will begin hedging programs soon.
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