Goldman Sachs, a leading financial institution, remains confident that the Organization of the Petroleum Exporting Countries (OPEC) will play a crucial role in maintaining stability in the oil market. Despite recent declines that pushed crude prices into bearish territory, the investment bank predicts that OPEC’s influence will establish a price floor for Brent crude within the $80-$100 range by 2024.
Goldman’s commodities analysts, led by Daan Struyven, believe that OPEC’s pricing power will be the driving force behind this range. They expect an $80 floor to be enforced through the OPEC put, a mechanism used by the organization to prevent prices from falling too low. Additionally, they anticipate a $100 ceiling based on OPEC’s spare capacity.
On Thursday, December West Texas Intermediate crude experienced a steep decline, dropping $3.76 per barrel or 4.9% to $72.90. This represents a significant 22.18% decrease from its 52-week high of $93.68 reached on September 27. Similarly, January Brent crude fell $3.76 per barrel or 4.63% to $77.42, nearing bear market territory with a 19.81% fall from its 52-week high of $96.55.
Both crude contracts settled at their lowest levels in over four months due to concerns about oversupply and weak demand. However, prices saw a modest increase on Friday, offering some relief to the market.
Goldman Sachs attributes the decline in oil prices to higher-than-expected non-core OPEC supply. The bank identifies two key factors contributing to this increase: the temporary surge in U.S. production growth following the ease in supply constraints post-pandemic, and supply from specific economies facing sanctions exceeding expectations in 2023.
Nevertheless, Goldman Sachs expects these factors to diminish over time. They anticipate non-core supply growth to slow down to 1.5 million barrels per day in 2024 compared to 2.5 million barrels per day this year, particularly in the United States. Considering stable demand, the bank foresees a net 0.7 million barrels per day deficit in 2024, an improvement from the 0.3 million barrels per day deficit predicted for 2023.
In conclusion, Goldman Sachs maintains a positive outlook on the role of OPEC in supporting oil prices and expects the organization to exercise its pricing power effectively to ensure stability in the market.
Goldman Sachs analysts, Struyven and co, predict that the oil market will gradually tighten while maintaining significant capacity to handle any short-term shocks. The current state of the market is only slightly tighter than usual, based on the level of OECD commercial stocks. Although this spare capacity delays the next oil super cycle, it does not entirely prevent it due to the long-term supply drivers.
Goldman Sachs expects Brent crude oil prices to stay above $80 per barrel. There are several reasons for this projection. Firstly, OPEC puts play a role in supporting the price. An OPEC put refers to the ideal selling price for crude that the cartel aims for, which Goldman Sachs estimates to be between $80 and $85 per barrel. Although spare capacity has increased compared to a year ago, a sustained drop below $80 would lead OPEC+ to bring back barrels more slowly.
Secondly, the global economy is expected to experience a soft landing where core inflation returns to target without causing significant damage to the labor market or oil demand. This scenario would help keep oil prices above $80.
Thirdly, when prices decline, there is an increase in U.S. net public and private demand for oil, according to the analysts. These factors contribute to the expectation of oil prices remaining above $80.
On the other hand, Goldman Sachs believes that a sustainable rise above $100 per barrel within the next year is unlikely. The ample spare capacity and China’s destocking of crude inventories are contributing factors to this prediction. Furthermore, the analysts anticipate that OPEC will pursue backwardation, where near-term oil prices trade higher than future prices.
The positive outlook for oil prices from Goldman Sachs is encouraging news for market bulls. The market has recently been experiencing contango, a situation where the forward price of a futures contract is lower than the spot price. Goldman Sachs’ predictions suggest a shift away from this unfavorable contango scenario.
Read: Fear ‘deep contango.’ Oil prices are slipping into a tough place to make money.