Goldman stays bullish on oil prices: "Demand concerns mask unresolved underinvestment"

Oil prices have finally caved into rising growth concerns, backpedaling to levels not seen since January and down almost 40% from the record US$138 a barrel set on 7 March.

Still, Goldman Sachs believes the dip is buyable given the "structural bullish supply set-up" borne from decades of underinvestment, low space capacity and inventories.

However, the once easy 'long oil' trade is now expected to be a bumpy ride due to headwinds such as the strong US dollar and ongoing recession risks.

Deteriorating growth

"We acknowledge the ongoing growth slowdown, and, as a result, now base-case global GDP growth outside of China of c.1% in 2023," Goldman analysts including Damien Courvalin and Callum Bruce said in a note on Tuesday.

"This is a cautious assumption, below consensus expectations, while in China, we expect that zero-Covid policies will remain in place through next summer."

Supply is still the bigger problem

"On the supply side, we continue to expect that Russian supply will decline into year-end when the EU embargo kicks-in alongside the end of the globally-coordinated SPR release," the analysts said.

Based on these views, the investment bank expects a "seasonally adjusted global oil market deficit in 4Q22 and in 2023, taking account of builds required for demand growth and for the redirection of Russian oil."

Only a recession can topple prices

Goldman said it would "take an economic hard-landing to justify sustained lower prices."

"While we acknowledge that the short-term path to prices is likely to remain volatile, with the US dollar in the opposite driving seat, we find our conviction in the long-term bullish view only reinforced by the ongoing global supply disappointments."

The investment bank expects prices to average US$100 a barrel in the December quarter, down from its previous forecast of US$125. In 2023, prices are forecast to remain buoyant and average US$108 for the year.

Brent crude oil chart (Source: TradingView)