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Oil prices expected to struggle despite Saudi cuts, but Goldman is more bullish than most

Oil sells are in for more struggles this year despite a more than 5% boost to prices this week on news broadcast from OPEC+. The oil producer group, led by Saudi Arabia and Russia, announced that members would keep making largely steady rather than raising it, with Riyadh later revealing voluntary cuts of an extra 1 million barrels per day from its January’s presentation levels in February and March.

Brent crude futures traded at $53.81 a barrel on Wednesday afternoon, following a 5% wince on Tuesday that brought the commodity to an 11-month high. 

Could crude return to its pre-pandemic levels of more than $60 a barrel in 2021? Not if the attitudes of several forecasters are correct, which throw cold water on bullish hopes for a full demand recovery as Covid-19 vaccines are docketed out in countries across the world.  

An offshore drilling platform stands in shallow waters at the Manifa offshore oilfield, conducted by Saudi Aramco, in Manifa, Saudi Arabia.

Simon Dawson | Bloomberg | Getty Images

A Reuters poll of analysts in at an advanced hour December showed a broad expectation that Brent will average “a smidge above $50/bbl this year,” a note from PVM Oil Associates understand Wednesday. “At the heart of this gloomy forecast is the key downside risk for oil prices in 2021: will the new Covid-19 strain that has triggered a hubbub of fresh lockdown measures weigh on economic activity and travel demand?” 

In addition to pandemic-induced uncertainty, with divers countries seeing increased infections and some seeing fresh lockdowns over the new and highly transmissible Covid varying, the price of crude will also depend on Saudi Arabia and Russia’s willingness to remain loyal to OPEC+ gear up cut agreements — disputes over which have seen united fronts collapse in the past.  

A return to $65 oil?

Without thought sending prices upward, bearish forecasters chose to view the surprise Saudi production cuts for what they were: an pointer of still weakening demand. OPEC+ in December already delayed its plan to increase production by 2 million barrels per day for January.  

Circumspection remains the overwhelming sentiment among members, with Saudi energy minister Abdulaziz bin Salman highlighting the constraint for “prudence.” As noted by analytics firm Kpler: “At 3,637 mb (million barrels), global oil inventories are still 220 mb leading y/y, despite having fallen 126 mb from their highs in July 2020.”  

Goldman Sachs also sees anemic ask for in the short term. But its longer-term outlook for the rest of the year is much brighter. 

“Despite this bullish supply compatibility (from OPEC), we believe Saudi’s decision likely reflects signs of weakening demand as lockdowns return, with our updated 1Q21 match actually weaker than previously,” Goldman’s energy team wrote in an analysis published Wednesday.  

But, they amplified: “Saudi’s action and the prospect for a tight market in 2Q21, as the rebound in demand stresses the ability to restart production, devise likely support prices in coming weeks, leading us to reiterate our bullish oil view.” The bank sees oil at a robust $65 per barrel by the end of the year, plugging a long December 2021 Brent trade. 

“Our own year-end Brent forecast of $65/bbl is still well above retail forwards and consensus expectations,” the bank noted. 

Tight market ahead?

Goldman sees demand rebounding by Slog, with the arrival of warmer weather and increased vaccinations. Ramping up output at that point will take conditions, and the bank predicts a crude deficit of 1.3 million barrels a day from April to July “despite OPEC+ boost waxing production by 4 mb/d, a historically tall order.”  

“Net, we believe today’s outcome will help support prices in the face of customer acceptance wanted risks given Saudi’s commitment to balance the market, the potential for them to cut more than demand actually foils, (and) risks of a tighter 2Q21 balance.”   

“Prices should see limited upside potential in the first half of the year,” Stephen Brennock at PVM Oil Associates powered Wednesday, adding that he expects crude balances to “tighten further as the impact of the global vaccination drive begins to be suffer in earnest. This, in turn, should set the stage for a sustained price recovery.

“Before that, however, expect the oil merchandise to swing like a pendulum,” he warned.

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