Markets underestimating oil demand; see Brent at $80: Goldman Sachs

Global markets are currently underestimating the demand for oil as more economies open up for business, says a recent report by Goldman Sachs that expects Brent to hit $80 per barrel going ahead. Recently, S&P Global Platts, too, had forecast oil prices hitting and staying above $70 a barrel by mid-2021, driven by a more broad-based pickup in economic activity amid widening vaccination rollouts.

Mobility, according to Goldman Sachs too, is rapidly increasing in the US and Europe, as vaccinations accelerate and lockdowns are lifted, with freight and industrial activity also surging. This developed market (DM) recovery, Goldman Sachs said, is in fact larger than estimates, and is helping offset the recent hit to demand and the likely slower recovery in South Asia and Latin America.

“Despite the global market deficit coming in line with our forecasts in recent months, we under-estimated the weight of such demand and Iran uncertainties, keeping prices trading below our $75 a barrel in the second quarter of 2021 (Q2-21) fair value. With growing evidence of the demand rebound, and imminent clarification on the likelihood of an Iranian return, we now see a clearer path for the next leg higher in oil prices, with the sell-off offering opportunities to position for the rally to $80 a barrel” wrote Jeffrey Currie, global head of commodities research at Goldman Sachs in a recent co-authored note.

Over the past one year, Brent crude oil prices have climbed nearly 85 per cent to $66 a barrel now, as the global economy opened for trade after a stringent lockdown triggered by the Covid-19 pandemic. 

Since March, the prices have been volatile on account of concerns over the pace and efficacy of vaccination, fresh Covid waves across emerging markets (EMs) and the return of Iranian barrels, with the latter pushing Brent prices down from $70 to $65 a barrel last week. 

“Our updated base-case is that the recovery in Iranian production will start in October (earlier forecast June 2022), reaching 3.5 million barrels per day (mb/d) after 6 months. OPEC+ will offset such a ramp-up by halting for two months its 0.5 mb/d monthly rate of production increase in the second half of 2021 (H2-21), leaving the destocking path unchanged for an only modest slowdown in the pace of its excess capacity normalisation," Currie wrote.

Meanwhile, those at S&P Global Platts forecast Iran’s crude and condensate exports to grow from about 800,000 b/d in April to 1.4 mb/d in December and 2 mb/d by July 2022.

International travel

International travel, according to Goldman Sachs is another key factor that is likely to trigger a demand rise, which in turn will keep oil prices elevated. On the other hand, shale oil production has been lowered by 0.25 mb/d in H2-21 as production and rig activity have continued to fall short of their expectation.

 

“With indications of re-opening international travel, we forecast that global demand will increase by 4.6 mb/d through year-end, with most of the gains expected in the next 3 months. In particular, we continue to expect only limited contribution from EMs outside of China, with 75 per cent of our demand recovery coming from DMs and China, jet demand and seasonal cooling in the Middle East,” Goldman Sachs said.