Just a speed bump? Oil has plunged, but Goldman is still bullish

A panic-sparked sell-off in the oil market sparked by virus concerns has put the commodity’s progress into question – but energy experts at Goldman Sachs do not appear to be shaken.

Fears over the burgeoning variant of the coronavirus delta and a new deal to increase the supply from OPEC + caused oil prices to fall by more than 7% at the start of the trading week on Monday.

The drop was the biggest since March, a sharp wake-up call for oil bulls who had profited from the highest commodity prices in 2.5 years.

International benchmark Brent crude was trading at $ 68.42 per barrel at 2:15 p.m. in London on Tuesday, down just over 7% from its Friday close at $ 73.59 per barrel.

Oil analysts were quick to point out the uncertain route of demand as new waves of Covid-19 infections – many among communities with high vaccination rates – threaten the final months of economic recovery.

“The market is clearly uncertain about the outlook for demand. And with good reason. The increase in cases of delta variants raises questions about the sustainability of demand,” Stephen Brennock, senior analyst at PVM Oil Associates wrote Tuesday at London. titled “Oil takes a beating.”

But Goldman Sachs analysts led by senior commodities strategist Damien Courvalin see the current setback as just a slowdown, with little concrete reason for oil bulls to worry.

Global oil balances are tighter than they were before, despite the agreement between OPEC and its allies over the weekend to cumulatively increase crude production by 400,000 barrels per day on a monthly basis from August.

The International Energy Agency has estimated a deficit of 1.5 million barrels per day for the second half of this year compared to its demand forecast in the absence of an OPEC supply agreement .

And Goldman predicts that the impact of delta is approaching “a potential of 1 mb / d (million barrels per day) hit for only a few months, let alone if vaccines prove effective in reducing hospitalizations in MDs (markets developing), the source of most of the improvements in summer demand, ”according to its latest report.

Goldman’s call is in line with its previously bullish stance, which predicted Brent to hit $ 80 a barrel in the second half of this year.

The optimistic recovery prospects, coupled with what she sees as OPEC’s “slower” than expected production ramp-up and tight supply, have so far meant that “our constructive view of oil prices remains intact “. But near-term demand hit by delta fears sparked a trade in the lender’s quarterly forecast: it now expects Brent to average $ 75 a barrel in the third quarter of this year and not hit. that $ 80 in the fourth quarter.

“Oil prices could continue to turn dramatically in the coming weeks given the uncertainties of the Delta variant and the slow pace of supply,” Goldman analysts wrote.

Nonetheless, they continued, “we believe that the revision of oil market prices to a higher equilibrium is far from over, with the upward momentum shifting from the demand side to the supply side.”

One factor that is less talked about in the picture of future demand is the world’s largest oil customer: China. The recovery of the world’s second-largest economy is showing signs of slowing down, which would dramatically change the trajectory of crude.

China’s crude imports were down 2% in May from the previous month and the lowest monthly volume since the start of the year, according to PVM Associates, falling to 9.77 million barrels per day. In July, they fell further to 9.55 million barrels per day, according to Refinitiv Oil Research. The country’s imports for the first half of 2021 were down 3% compared to the same period in 2020, and the first contraction of this level since 2013.

“China’s latest GDP data suggests the country’s V-shaped economic rebound from Covid-19 is cooling off,” PVM’s Brennock wrote. “Even more worrying, recent customs data from China is giving the market mixed signals that are leaning on the bearish side.”

The confluence of uncertain demand due to the delta variant, cooling import levels from China, and the reintroduction of supply from OPEC and its allies, known as OPEC +, suggest bearish signals for the market. But how long the uncertainty will last, and whether national vaccination campaigns can compensate for the mutation of the virus, will ultimately determine the picture of demand. In the meantime, supply dynamics, particularly the current tightening in inventories, continue to fuel oil bulls.

“Questions arise as to whether the recently announced increase in OPEC + supply will overwhelm the recovery in demand,” Brennock wrote. “Currently, that seems unlikely, although evidence from the world’s largest oil-importing country seems to support the bearish narrative.”