Crude oil prices may hit $135 per barrel in next 12 months, Goldman Sachs says oil shortage unresolved

Crude oil prices have risen sharply in the last few months, on the back of fall in Russian exports and demand cuts in China. Brent Crude and WTI crude futures were trading above $120 per barrel on Thursday morning and could rise further, said analysts at Goldman Sachs. On the demand side, analysts believe the weak global growth outlook would not be sufficient to rebalance inventories at current crude oil prices. “As a result, we believe oil prices need to rally further to normalize the unsustainably low levels of global oil inventories, as well as OPEC and refining spare capacities,” Goldman Sachs said in a report this week, adding that brent may average $135 per barrel in the next 12 months.

Structural shortage continues

Analysts at the global brokerage firm believe that the structural shortage of crude oil remains unresolved even though oil market touched first surplus since June 2020 in April-May of 2022. “This politically created surplus is already ending, however, driven by the ongoing recovery in Chinese demand, with an 0.5 mb/d expected further decline in Russian production following the European ban,” they said.

The oil deficit ended in April when countries released supply from strategi reserves and demand fell. “The longest oil deficit on record finally ended in April, after a 1,350 mb decline in  global inventories over 23 months,” Goldman Sachs said. They added that this was caused owing to Russian export decline, demand reduction from China, and a record large SPR release. Now, Chinese demand is improving with covid restrictions being lifted. 

Supply may not be adequate going forward

Crude oil prices have risen sharply this year. Bloomberg said prices have risen more than 50% so far in 2022. While demand has risen in 2022, on the back of improvement in activity post-covid, the oil-deficit is likely to be renewd as supply remains tight. However, the supply side of the oil equation has continued to disappoint despite sharply higher oil prices, Goldman Sachs said. Based on trends, analysts have also lowered their production expectations across countries. 

Given both record low inventories and OPEC spare capacity, analysts said that they believe the market will solve to balance in the short-term and recreate the necessary buffers in the coming year. “Specifically, we estimate that our prior price forecast (Brent at $125-115/bbl in 2H22-2023) would still leave the market in a -0.2 and -0.25 mb/d deficit for each period,” they added. “Forcing the market to balance in the short-run and create excess inventories next year therefore requires a higher oil price forecast over both periods.”

Strong up-move projected

Goldman Sachs said that Brent crude prices will need to average $135 per barrel the second half of 2022 and first half of 2021, which is an increase of $10 per barrel to the previous forecast. Analysts said that such a rise is needed for inventories to finally normalize by late 2023. They added their projection represents summer retail prices reaching levels close $160 per barrel.

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