Goldman Sachs downgraded its oil price forecasts on Monday, surprising the market amid a rise in crude prices driven by rising geopolitical tensions in the Middle East.
The commodity team led by Daan Struyven has lowered its forecast range for Brent oil by $5 per barrel, bringing the new range to $70-$85. The forecast for the average Brent price in 2025 has also been lowered from $82 to $77 per barrel.
This downward revision reflects surprising inventory increases at the OECD (Organization for Economic Co-operation and Development), ongoing demand challenges in China and a reduced estimate of fair value for long-term prices, the company said.
Goldman analysts noted that “Brent oil prices have continued to fluctuate within our historical range of $75 to $90 this summer,” largely due to the market’s oscillations between fears of supply shortages due to geopolitical risks and concerns about slowing demand, particularly in Western countries and China.
China’s oil demand weakens, US supply surprises positively
A key factor in the revised forecast is slower-than-expected demand growth from China. Goldman Sachs now expects Chinese oil demand growth to slow to just 0.2 million barrels per day (mb/d) in the first half of 2024, with negative year-on-year growth expected in the summer of 2024.
On the supply side, the US continues to beat expectations. August data shows that crude oil production in the 48 US states rose to 11.25 million barrels per day, 0.2 million barrels per day more than Goldman’s previous forecasts.
“US supplies of crude oil and natural gas liquids (NGLs) are exceeding expectations,” Struvyen said.
The bank attributes this to operational efficiency gains at U.S. producers that have enabled faster development of new oil sources. These efficiency gains helped many publicly traded U.S. oil producers beat their second-quarter 2024 forecasts by about 3%.
Despite this robust U.S. supply, Goldman Sachs still sees “upside risk to implied oil price volatility.” The report highlights potential near-term inventory volatility, geopolitical uncertainties and the possibility of a decline in Iranian supply as key factors that could lead to higher volatility in oil prices.
Downside risks for the oil price
The bank’s forecast for the fourth quarter of 2024 assumes that the price of Brent oil will be $81 per barrel. By December 2025, prices are expected to fall slightly to $74 per barrel.
Goldman warns that oil prices could fall below these levels if certain downside risks materialize.
“Given high spare capacity, potential trade tensions and the possibility of OPEC fully reversing additional cuts in 2025, the risks to our $70-$85 price range are to the downside,” the report said.
For example, if China’s oil demand remains stagnant at the current estimate of 15.8 million barrels per day, the Brent price could fall to $60 per barrel by December 2025.
Similarly, a general tariff of 10 percent on US goods imports could push the price of Brent to $63 per barrel. A full reversal of OPEC’s additional 2.2 million barrels per day cuts could push the price down to $61 per barrel.
Goldman Sachs is also looking at more severe scenarios, including a moderate global recession. Should OPEC respond with production cuts in such an event, Brent could fall by $30 per barrel from the base case. Another scenario sees the US Federal Reserve suspend its rate cuts in 2025 due to higher core inflation caused by trade tariffs, which could lead to a $19 per barrel decline from the base case.
Short-lived disruption in Libya, OPEC reverses production cuts
The bank’s updated oil outlook includes an assessment of the recent oil rally.
On Monday, oil prices rose, as indicated by the United States Oil Fund USOrose 3% due to tensions between Israel and Hezbollah and production disruptions in Libya.
The government in eastern Libya has indicated that there could be possible production halts due to conflict with the government in the west, which Goldman Sachs said could reduce production by 0.6 million barrels per day in September and 0.2 million barrels per day in October.
Goldman Sachs analysts expect these disruptions to be short-lived as both governments have incentives to resume production.
Looking ahead, Goldman expects OPEC+ to begin phasing out the additional voluntary cuts of 2.2 million barrels per day it announced previously. In particular, Saudi Arabia is expected to gradually increase its crude oil production from just under 9.0 million barrels per day to just over 9.2 million barrels per day by December 2024.
Read more:
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
