Goldman Sees Brent Oil at $75 as Supply Response Trails Demand

Feb 21, 2021

(Bloomberg) Oil prices will rally sooner and higher than previously thought as the global energy demand recovery outpaces the supply response from the OPEC+ alliance, shale and Iran, according to Goldman Sachs Group Inc.Consumption will get back to pre-virus levels by late July, while output from major producers is likely to remain “highly inelastic” to the rising prices, the bank said in a note. Goldman raised its Brent forecasts by $10 a barrel, to $70 next quarter and $75 in the following three months.“This faster re-balancing during what was expected to be the dark days of winter will be followed by a widening deficit this spring as the ramp-up in OPEC+ production lags our above-consensus demand recovery forecast,” bank analysts including Damien Courvalin said in the note.

Brent has quickly gotten back to pre-virus levels

Oil’s rebound to levels last seen before Covid-19 wreaked havoc on the global economy has been driven by Saudi Arabia’s unilateral output cuts together with the improving demand outlook. The rally has also been supported by investors using crude to position for a reflationary environment, Goldman said. Brent oil traded above $63 a barrel on Monday and is up around 22% this year.

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Supply will keep lagging behind demand for several reasons, the bank said:

OPEC+ will fall behind the market rebalancing, especially as the pace of global drawdowns of stockpiles has accelerated
There are no signs of more activity from most non-OPEC+ producers outside of North America, creating a risk supply will fall 900,000 barrels a day short of the bank’s estimates in the coming year
The U.S. earnings season confirms that big explorers and producers, the key drivers of U.S. shale output, remain focused on returning cash to shareholders
Indications from the U.S. government suggest Iranian output likely won’t increase in the short term