Crude Oil: The darkest hour is just before dawn – Goldman Sachs

Analysts at Goldman Sachs explain that the oil market rebalancing appears off to a bad start, with record high US crude inventories and a sharp rebound in US drilling leading a growing number of OPEC producers to support an extension of their cuts for another six months.

Key Quotes

“Despite this perceived lackluster start to the year, OECD inventories have drawn outside of US crude and we expect that high compliance with the cuts in 1H17 and strong oil demand will more than absorb higher US production and drive inventories lower through the year. This constructive view on oil fundamentals and our view that it is not in OPEC’s interest to see prices trade above $60/bbl sustainably leaves us expecting that an extension of the cuts for a full six months is currently not necessary. Importantly, macro data available so far this year suggests that the strong growth momentum of late 2016 is continuing. This creates upside risk to our above consensus 1.5 mb/d 2017 global demand growth forecast and could help accelerate the ongoing rebalancing of the oil market.”

“Price Outlook: We forecast that inventories will continue to decline driven by the combination of production cuts and the strong demand growth. We reiterate our outlook for WTI prices to rise to $57.50/bbl ($59/bbl Brent) in 2Q17 before declining to $55/bbl ($57/bbl Brent) for the rest of the year. An extension of the cuts would create upside risk to our 2H17 forecast but downside risk to our medium term price forecast given the accompanying global drilling response set to take place at higher oil prices. It is important to emphasize that our bullish price forecast is a view on the shape of the oil forward curve, with the faster decline in long-term oil prices than we expected a clear downside risk to our spot price forecast, even if our oil supply-demand projections prove correct and the rotation of the forward curve occurs.”

“Timespread Outlook: With our expectation that inventories will normalize as demand improves and the cuts materialize, we expect time spreads to strengthen and go into backwardation by 3Q17. With crude inventories accumulating in the US and US crude production rebounding, we expect that the strength in timespreads will first occur in Brent, with WTI lagging.”