Goldman Sachs no longer expects oil prices to hit US$100 a barrel over the next 12 months as banking stress and recession fears offset China’s reopening demand boom.
The investment bank lowered its Brent forecasts to US$94 a barrel for 12 months ahead and US$97 a barrel for the second half of 2024. These revisions are down from US$100 previously, reflecting:
Softer fundamentals
Lower demand
Moderately higher non-OPEC supply
Oil posted its worst weekly performance since March 2020 last week, down 13.2% to levels not seen since December 2021. Prices have almost halved from the brief March 2022 peak of US$126 a barrel.
“Over the past 12 days, rising near-term recession concerns, and an exodus of investor flows have pushed oil prices sharply lower,” Goldman Sachs said in a note on Monday.
“The first leg down in oil prices followed Chairman Powell’s hit at a potential return to 50 bp hikes on March 7 … the second sharper leg down in oil prices coincided with signs of stress in the banking system and a sharp decline in bank equities and interest rates.”
“Historically, after such scarring events amid high uncertainty, positioning and prices recover only gradually, especially long-dated prices,” the analysts said.
“However, our economists still believe that the US and Europe will avoid recession given relatively elevated capital buffers in the banking system and ongoing policy support.”
Last week, Goldman downgraded its US fourth quarter GDP forecast by 0.3 percentage points to 1.2%, citing that tighter lending standards could weigh on aggregate demand.
“We still expect that sharp rises in Emerging Markets oil demand will outweigh modest declines in Developed Markets demand, push the market back into deficits from June onward, and drive an oil price recovery,” said analysts including Daan Struyven and Callum Bruce.
This view is in-line with OPEC’s March report, which expects the market to tip back into deficit in the third quarter of 2023.
OPEC flagged that downside risks remain and need to be carefully monitored in the coming months including:
Continued geopolitical tensions in Eastern Europe
China’s ongoing domestic challenges stemming from its still-fragile real estate sector
China’s reopening leading to a strong rise in consumption and keep global inflation elevated
There was also upside potential coming from factors such as:
The Fed successfully managing an inflation slowdown in the second half of 2023
A stronger-than-expected rebound in China
Better-than-expected economic dynamics for the Eurozone
Inflation subsiding more rapidly than expected, providing central banks with room for more accommodative monetary policy
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