Goldman Says $40 Oil Call May Be Too Low as Demand Surprises

Goldman Sachs Group Inc. said it didn’t expect oil demand to recover so quickly and its forecast for crude at $40 a barrel may be too low.

While the bank projects that oil will still reverse its recent advance, the failure of global inventories to increase amid weather-related disruptions and stronger-than-expected demand means there’s a risk prices will miss its target for the next two quarters, according to a report dated March 8. Morgan Stanley also said the oil market was “surprisingly healthy.”

Global benchmark crude prices rose in February for the first time in eight months, rebounding from an almost 50 percent loss in 2014 as U.S. production surged to a 30-year high. Sandstorms disrupted Iraqi exports while cold weather in the U.S. and a drought in Brazil bolstered consumption, according to Goldman Sachs.

“The lack of a meaningful build in the past few months leaves risk to our forecast for oil prices remaining at $40 a barrel for two quarters skewed to the upside,” Goldman analysts including Damien Courvalin in New York wrote in the report. “Weather has played a great part in keeping crude off the market.”

Price Rebound

West Texas Intermediate crude, the U.S. benchmark, rose as high as $54 a barrel last month on speculation a recovery in demand was helping shrink a global glut amid a slowdown in U.S. drilling. The April contract was at $49.79 a barrel on the New York Mercantile Exchange at 7:50 a.m. local time. Brent crude was at $59.50 in London after touching $63 a barrel in February.

Goldman forecast in a Jan. 11 note that WTI would drop as low as $40.50 a barrel in the second quarter before rebounding to $65 in 2016. The bank projected that Brent will slide as low as $42 and average $70 next year.

Weather, violence or sanction-related supply disruptions in Iraq, Libya and Iran removed 885,000 barrels a day from the global market in January and February relative to December, according to the bank. Winter consumption also led to stronger-than-expected demand from the Middle East to the U.S., it said, predicting global consumption growth of 1.35 million barrels a day in 2015.

Weather Changes

These bullish conditions may not last as Libyan disruptions peak while a return to normal weather in Iraq may spur a recovery in exports, according to Goldman. At the same time, Russia, Brazil, Saudi Arabia and the U.S. may continue to boost output. The end of winter may lead to a deceleration in demand growth, it said.

“While we reiterate our out-of-consensus view that demand growth will be strong in 2015, on the back of better economic growth and low oil prices, we did not expect demand to be so strong this soon,” the analysts said. As leading economic indicators signal activity may weaken “our expectation going forward is therefore for the global crude inventory build to resume,” according to the report.

High demand from refiners for crude and supply disruptions in Iraq and Libya meant the market was unexpectedly strong, Morgan Stanley said in an e-mailed report Monday. By the northern hemisphere summer, seasonally weak demand for oil products may prompt an increase in stockpiles and weigh on prices, it said.

WTI may not reach Goldman’s forecast of $65 a barrel in 2016 as U.S. producers prepare to increase activity later this year by raising equity, reducing debt and “building an uncompleted well war chest,” according to the report.

“Producers will be better positioned to deliver strong production growth later this year and into 2016, undermining the market re-balancing,” it said.

(source: bloomberg)