Oil futures24 May 2021 12:14
Goldman Steamrolls Iran Oil Output Fears, Sees Crude Hitting $80 In Months
Toward the end of Q1, Goldman Sachs along with virtually every other major bank, predicted that oil had nowhere else to go but up, with bank after bank hiking their oil forecast. It also top-ticked the market, as Goldman's Damien Courvalin writes in a note published on Sunday discussing "the path to higher oil prices", in which he admits that despite the bank's "balls to the wall" bullish stance on crude, "the oil rally has given way to sideways volatility since March, due to concerns over vaccination pace, EM Covid waves and the return of Iranian barrels, with the latter pushing Brent prices down from $70 to $65/bbl last week." Or, as the bank calculates, "last week’s large sell-off was equivalent to bringing forward by 3 months a 1 mb/d increase in global production, leaving the market likely pricing the return of Iranian barrels by late summer."
After such a retracement, the Goldman commodities strategist predicts that while the market is now "pricing a return of Iranian barrels by late summer" it is again "underestimating the upcoming demand rebound, too pessimistic a view on both accounts." Which, of course, is someone that is bullish on oil would say.
Anyway, here is Courvalin's math explaining why the market is too pessimistic in his view: On Iran, while comments suggest significant progress has indeed been made, the timelinen is still uncertain as according to press reports, negotiations appear focused on an agreement on the conditions for reinstating the JCPOA, implying a lag (or potential impasse) in lifting US secondary oil sanctions, or conditions that could limit the size of such a restart.
On demand, Goldman says that the recovery in DM mobility and travel is on track to exceed its expectations, helping offset the recent hit to South Asia and Latin America demand: "Mobility is rapidly increasing in the US and Europe, as vaccinations accelerate and lockdowns are lifted, with freight and industrial activity also surging. This DM recovery is in fact larger than we had assumed, helping offset the recent hit to demand and the likely slower recovery in South Asia and Latin America."
On supply, Goldman is lowering its non-OPEC+ production forecasts to account for still depressed activity levels and a slower expected rebound from shale. Given the current global deficit of 1.8 mb/d in 2Q21, Goldman believes that this demand impulse will not only absorb remaining excess inventories and a potential July ramp-up in Iran supply... ... but still require a cumulative additional 2.8 mb/d increase in OPEC+ production by Dec-21 (requiring an early exit from their April 2020 agreement).
Putting these three together, Goldman assures its clients that the "case for higher oil prices therefore remains intact given the large vaccine-driven increase in demand in the face of inelastic supply."
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