The crystal ball rubbers in Goldman Sachs commodities unit delivered a fairly uncontroversial view as they indicated further volatility in crude oil markets later in 2020.
Oil prices yesterday reached as high as $43 a barrel following the recent supportive moves by OPEC and Russia – which have a pact to without production to keep a floor beneath prices – as well as other macro-economic factors, yet experts at Goldman reckon the fundamentals in the market are bearish.
Indeed, preceding the latest OPEC+ output accord, the extreme and anomalous swing to negative pricing amid May’s future’s contract rollover provides some indication of what can happen when the current market fundamentals are untouched by intervention.
Simple economic facts tell a quite simple story. Coronavirus (COVID-19) lockdown exacerbated an already weakening demand narrative over the near-to-medium term. China isn’t driving demand quite as much as it used to. And, at the same time, a major oil producing states have been locked in a multi-year tussle for market share.
Goldman, in a note, highlighted that the current rally was caused by artificial squeeze and that a collapse in refining margins suggest crude is overvalued and the demand recovery will be moderate.
The bank reckons Brent will drop back to US$35 per barrel.
"This rebound has been fueled by a macro risk-on backdrop and a policy-induced Chinese crude import binge, yet fundamentals are turning bearish," Goldman said. Such supports aren’t certain over the longer term.
The US bank also points to an expected rise in US output, from shale operations, as another potential downwards catalyst, particularly for West Texas Intermediary crude oil .
Looking further ahead, however, bring further complexities as under-investment amid today’s low oil sales prices may lead to future supply shortages – and, so, the crude cycle continues.
On Tuesday, Brent crude was down 0.7% changing hands at US$40.50 per barrel whilst WTI crude was 0.47% lower at US$38.