Goldman Sachs cuts oil price forecast by $10 but remains bullish long-term

Goldman Sachs cut its December quarter oil forecasts by US$10 a barrel to US$100 to reflect China's covid outbreak and lack of clarity over the G-7's plan to cap Russian oil prices.

"We believe the market is right to be anxious about forward fundamentals, due to significant covid cases in China and a lack of clarity on the implementation of the G-7's price cap," the analysts said in a note on Tuesday.

Beijing faces its 'most severe covid test'

China's covid cases have climbed to levels not seen since April, with Beijing authorities citing that "the city is facing its most complex and severe prevention and control situation since the outbreak of the coronavirus."

The confidence for a full Chinese reopening in the second quarter of 2022 remains high, according to Goldman. However, the "path between now and next spring remains highly uncertain."

"The logic of exponential virus spread, means further lockdowns will likely be required, if full reopening is not feasible. Therefore, we cautiously lower our expectations for China demand by 1.2 million barrels a day in 4Q22," the analysts said.

The 1.2m barrels a day downgrade is equivalent to OPEC's recently implemented supply cut.

G-7 uncertainty

"Russia oil export flows are being maintained at elevated levels despite the imminent implementation of the EU embargo on crude oil, alongside the G-7 price cap," the investment bank said.

There is an expectation that Russia will 'rush to evacuate barrels' as vessels will soon begin to struggle to find end-consumers, according to Goldman. While Russian production is forecast to rise by 300,00 barrels a day in the December quarter, production "will have to sequentially decline by 600,000 barrels a day ... by March 2023."

Buy the dip

The underlying trends in oil markets remain healthy despite a more pessimistic near-term outlook, according to Goldman.

"Oil inventories have been drawing at a rate of circa 1.5m barrels a day over the last four weeks, versus a seasonal build of 500,000 barrels a day," the analysts said.

"For longer-term investors, the current sell-off provides an opportunity to add length on yet another speed bump that will come to pass."

"From a tactical perspective, uncertainties abound, while discretionary positioning is still long and CTAs flows will be selling, leaving risks skewed lower in the near-term."

Brent crude year-to-date (Source: TradingView)