Goldman Sachs still sees the global crude market in deficit before the middle of the year

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After surging more than 30% from mid-November to early January, the crude price has wavered in recently as traders weigh up issues ranging from production cuts from OPEC and non-OPEC nations announced in late November, to stronger global economic conditions against renewed US dollar strength, a pickup in US shale oil production and a strong lift in US crude inventories.

Prices have been range-bound as a consequence, with doubts over the expected timing of the crude market rebalancing — eliminating surplus conditions seen in recent years — will occur.

Front-Month WTI Futures – Daily Chart

The lift in US crude inventories has dominated market sentiment this week following the release of data from the US Energy Information Administration (EIA) that revealed a huge 13.8 million barrel build last week, well above the 2.5 million expected.

It was the second-largest weekly increase on record, and created more than a little concern that it will take far longer for surplus conditions in the crude market to pass.

But not Damien Courvalin, Abhisek Banerjee and Chris Mischaikow, members of Goldman Sachs’ commodities research team.

In a note released following the EIA data, the trio outlined why they remain confident that the global crude market will shift from surplus to deficit in the first half of this year.

“We view imports as the key driver to these large builds and as the simple reflection of the 4Q16 global oil market surplus of more than 0.5 mb/d [million barrels per day],” Courvalin, Banerjee and Mischaikow say.

“Given the relatively high compliance to the proposed cuts so far, we believe that this import channel will reverse from March onward. As a result, we do not view the recent excess US builds as derailing our forecast for a gradual draw in inventories, with in fact the rest of the world already showing signs of tightness.”

Though they admit inventory draws will start from a higher base than what was expected, they say that improved economic data helps to bolster confidence that rebalancing will still occur, suggesting it creates upside risks for global demand in the period ahead.

“Macro data available so far this year suggests that the strong growth momentum of late 2016 is continuing, with global manufacturing PMIs at their highest level in six years in January,” they say. “This creates upside risk to our above consensus 1.5 mb/d 2017 global demand growth forecast and could help accelerate rebalancing of the oil market.”

While they admit that a faster-than-expected rebound in US shale production creates downside risks to its WTI price forecast in 2018 of $US55 per barrel, it does not shift their expectation that the global oil market will shift into deficit in the first half of 2017.

Front-month WTI crude futures currently trade at $US53.14 per barrel, up 3.75% from the levels hit earlier this week. Year-to-date they’ve fallen just over 1%.

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