Goldman’s energy analysts are reiterating their prediction that crude prices will rise substantially…and say that the dip presents a compelling entry point into the market. The analysts attribute the recent collapse to a “combination of financial concerns, scepticism, and real and perceived demand weakness.” This being the case, the group has lowered its 6-month forecast for WTI crude prices from $142 to $125:
We stand by our bullish view on oil, but just think it will now take longer to get to our previous price targets as the overshoot in June and July increased the forward price elasticity of demand (making demand more price sensitive) and restrained economic activity as global economic growth breached energy supply constraints, particularly in the emerging markets where energy shortages were the most severe.
The group offers one qualification, however. If the current economic misery gets worse, prices could fall even lower:
If the current macroeconomic concerns become a full blown global recession, which Goldman Sachs economists still view as relatively unlikely (with a less than 15% probability of occurring), we believe prices could dip as low as $75/bbl. However, given the tight inventory situation and high price volatility, should shortages develop this autumn as the US market ramps back up from the hurricane shut-ins, we believe that the market could spike $10/bbl to $15/bbl higher than our targets.
The bottom line for Goldman is that supply still remains constrained and that, long-term, there is little to suggest that enough new production can be brought online to meet new demand:
The supply side of the market still remains severely constrained. As evidenced this past July at $140/bbl, oil producers raced to squeeze as much supply out of the system as possible, yet created only a very modest inventory cushion despite a substantially weaker demand environment. It is this lack of a significant inventory build in July followed by draws in August and a likely draw in September that is one of the key drivers behind our view of a fourth quarter rebound in oil prices, as it leaves the market vulnerable to any type of shock.
We stand by our view that commodity prices cannot trend up indefinitely and the structural support for prices will come to an end. But we don’t believe that the events of this summer constitute that end. Without significant new production capacity across the commodity complex, the market has only one option and that is to make significant and lasting demand adjustments that are today not achievable given technological, logistical and social constraints globally. The amount of demand adjustments seen this summer do not even scratch the surface of the adjustments that will need to be done if production capacity is not expanded at a rate to meet trend global GDP growth of 3.8% pa.
Business Insider Emails & Alerts
Site highlights each day to your inbox.