OPEC+ Will Be Unwilling And Unable To Stop The Oil Price Rally

Few could have predicted that after an already extensive bull run this year amid recovering demand, oil prices had much further to go. And yet, the world’s most traded commodity just got a major boost from the gas crunch in Europe and Asia, prompting forecasters to update their forecasts. One of the most bullish of all observers has been Goldman Sachs, whose commodity analysts have stuck to their price target of $80 for Brent crude regardless of the resurgence of Covid-19 in many key markets and other bearish events. Now, these analysts have raised their target to $90, arguing that oil has entered a structural bull market.

In a note from earlier this week, the Goldman commodities team noted the sizeable drawdowns in oil stocks, which currently stand at around 4.5 million bpd and which are the biggest daily drawdowns ever recorded, are one of the factors driving the shift from a cyclical to a structural market.

Defined as a market - bearish or bullish - that is driven by factors such as fundamental imbalances and financial bubbles, the structural bull market for oil was also affected significantly by the loss of U.S. oil production caused by Hurricane Ida. With some 30 million barrels in total estimated production losses, Ida has become not only one of the most devastating hurricanes in recent history but one of the main reasons that OPEC+ production ramp-ups since July this year will fail to make a difference to world supply.

In fact, the International Energy Agency reported earlier that because of Hurricane Ida, global oil supply actually fell in August, despite OPEC+ ramp-ups, by 540,000 bpd. The IEA added it expected production growth to resume next month, but according to Goldman Sachs, this will be nowhere near enough to restore the balance between supply and demand.

The investment bank’s commodity analysts now expect Brent crude to hit $90 by the end of the year as demand for oil recovers amid the recovery in travel. The recovery, according to the analysts, will be driven by lower infection rates during the latest Covid-19 wave, which is proof that vaccination works and a return to normal life may be attainable once again.

This is not what the average consumer of news would gather from browsing Covid-19 related reports, but the continued increase in oil demand suggests those reports only show part of the picture, and the other part is not all that pessimistic.

Finally, there is the bonus bullish factor for oil: the gas crunch that has crippled Europe and is beginning to cripple China as well.

A combination of underinvestment in local production, a jump in demand as economic activity rebounded, and a harsh winter last year that left storage caverns half-empty turned into a perfect storm for Europe earlier this year and pushed gas prices sky-high, prompting utilities to restart coal and oil power plants. China, on the other hand, is suffering the effects of tight coal supply and self-imposed stricter emission regulations that have added to energy costs.

All this will drive a persistent deficit for oil markets, the Goldman analysts noted. Further, “its scale will overwhelm both the willingness and ability for OPEC+ to ramp up.” A recovery in U.S. shale will also be insufficient to erase the deficit, the analysts noted.

This basically means oil will remain higher for longer - a scenario that would have been unlikely at best a few months ago despite the recovering demand because of the focus on renewables and their role in killing oil demand permanently. Now, to add insult to injury, coal prices are also soaring as European utilities stock up to be prepared for the drop in renewable generation during the winter.

By Irina Slav for Oilprice.com