A few weeks ago, Goldman Sachs made headlines when it slashed its oil price forecast by nearly 10%. This came as a surprise to many, as the oil market had been showing signs of recovery thanks to rising demand and supply cuts. However, Goldman Sachs’s analysts pointed out that the recovery was being jeopardized by increasing oil supply from Russia. In this blog post, we’ll dive deeper into the reasoning behind Goldman Sachs’s decision and what it means for the oil market.
In a report released in late June, Goldman Sachs revised its Brent crude oil price forecast for the third quarter of 2021 from $80 per barrel to $75 per barrel, representing a 9% decrease. The bank’s analysts explained that the downward revision was due to the increasing supply from Russia, which was defying expectations by ramping up production faster than anticipated. According to Goldman Sachs, Russian oil production is likely to increase by 1 million barrels per day (bpd) by the end of 2021, compared to the bank’s previous forecast of a 500,000 bpd increase.
The fact that Russia is increasing its oil supply is not necessarily bad news in itself, as it could help meet rising demand from China and other emerging markets. However, what worries Goldman Sachs is that this increase in Russian supply could offset the supply cuts that were agreed upon by OPEC+ (the group comprising of OPEC and its allies) in the wake of the pandemic. OPEC+ had agreed to cut production by 9.7 million bpd in 2020, and while some of those cuts have been eased, the group is still withholding nearly 6 million bpd of supply.
Goldman Sachs’s analysts argue that if Russia continues to increase its oil production at the current pace, it could trigger a price war between OPEC+ and Russia, with the latter going back on its promise to restrain supply. This could lead to an oversupply of oil and put downward pressure on prices. Furthermore, the bank notes that there are also risks to demand growth, as the spread of the Delta variant of COVID-19 could slow down the global economic recovery and dampen oil demand.
In response to Goldman Sachs’s report, the oil market saw a sell-off, with Brent crude falling by more than 3% to around $73 per barrel. However, other analysts have been more bullish about the future of the oil market, citing the strong rebound in demand and the potential for supply disruptions in other countries due to geopolitical tensions or weather-related events.
Goldman Sachs’s decision to slash its oil price forecast by nearly 10% may have caused some jitters in the oil market, but it’s important to remember that the bank’s analysts are not the only voices in the room. While the increasing supply from Russia is a concern, there are also factors that could boost prices, such as growing demand and potential supply disruptions. Ultimately, the future direction of the oil market will depend on a multitude of factors, from geopolitical tensions to technological advancements. As always, investing in the oil market carries risks, but also opportunities for those who can read the signs and make informed decisions.