Goldman Sachs downgrades oil price outlook, expects prices to 'recover only gradually'

Tue 21 Mar 23, 10:28am (AEST)
barrels of oil
Source: Unsplash

Key Points

  • Goldman Sachs lowered its 12-month oil price outlook from US$100 a barrel to US$94
  • This revision reflects softer fundamentals, lower demand, and moderately higher non-OPEC supply
  • A sharp increase in Emerging Market demand is expected to push the market back in deficit in the second half of 2023

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.”

Oil price chart
WTI weekly chart (Source: TradingView)

Where to from here?

“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. 

“A longer road to higher prices”

“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 outlook
Source: OPEC

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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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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