Analysts at Goldman Sachs say they expect drivers of the supply shortfall pushing oil price to continue and that this could sustain crude at around $72.5 a barrel till June end and this could help the economy of oil dependent nations like Nigeria where tepid growth is raising fresh concerns of worsening poverty levels.
In a note Tuesday morning and seen by BusinessDay, the analysts said, “Brent prices have finally reached $70/bbl, following a fundamentally led rally reflective of a deficit larger than even we had forecast.
“We expect the drivers of this deficit to persist through 2Q19: the “shock and awe” implementation of the OPEC cuts, global activity sequentially accelerating, further tightening of US oil sanctions and an only moderate increase in shale production for now.
“With lower projected inventories, we expect further backwardation and modest upside to spot prices with our 2Q19 forecast now at $72.5/bbl (from $65/bbl previously), effectively base casing the upside risks that we had been highlighting.
“While the macro risk-on environment and the threat of disruptions may drive spot prices even higher, we still expect that prices will decline gradually from this summer as shale and OPEC production increases.
According to the report, “we therefore find more compelling opportunities for corporates and investors in time-spreads, differentials and product cracks.
“With large spare capacity in OPEC and the Permian basin and a wave of long-cycle projects still expected to come online in 2020, we maintain our $60/bbl forecast for next year.
“Beyond disruptions, the key to further spot price upside in coming months and years will be how OPEC manages its exit from the current cuts.
“Should long-dated prices rally and become unanchored once again, our conviction in lower prices next year would increase given the likely shale supply response.
“Conversely, guidance for higher output in coming months would likely weight on long-dated prices, maintain backwardation and lead to persistent shale restraint, creating upside risks to our 2020 spot price forecast.
“We believe that such an outcome would resemble the oil market of the 1990s, characterized by tight spot markets but well supplied forward balances and reflected in steady backwardation with an anchored back-end.
“We view this as the most compelling outcome for OPEC and the market structure most likely to be sustainable.
“But having been waiting for this shift since 2016, we are not yet ready to base case it, even though the maturing shale producer landscape should eventually help achieve it.”
