Goldman Surprised By Oil Market's Flip To Deficit On Supply Cuts

(Bloomberg) -- The global oil market has flipped to a deficit sooner than Goldman Sachs Group Inc. had expected.

A sharp decline in production driven by unexpected disruptions in supply as well as sustained strong demand have led to a “sudden halt” to the market surplus, Goldman analysts including Damien Courvalin and Jeffrey Currie wrote in a report dated May 15. That’s prompted the bank to raise its U.S. crude price forecasts to $50 a barrel for the second half of 2016 from a $45 estimate in March.

The unexpected outages caused by everything from wildfires in Canada and pipeline attacks in Nigeria will keep the market in deficit through the second half of this year, according to Goldman. Still, the return of some of the output and higher-than-expected U.S., North Sea, Iraq and Iran production means the bank predicts the shortfall will be at 400,000 barrels a day versus 900,000 that was previously expected. A shift back to a surplus is seen in early 2017, it said.

“The physical rebalancing of the oil market has finally started,” the Goldman analysts wrote. The changes to forecasts “reflects our long-held view that expectation for long-term surpluses can create near-term shortages and leaves us cyclically bullish but long-term bearish.”

Oil Demand

Goldman cut its crude price forecast for the first quarter of 2017 to $45 a barrel from $55 previously, but sees oil rising to $60 by the end of that year. The bank expects global oil demand to grow by 1.4 million barrels a day in 2016, versus 1.2 million predicted earlier.

West Texas Intermediate crude, the U.S. benchmark, rose 1.6 percent to $46.96 a barrel by 10:25 a.m. Singapore time on the New York Mercantile Exchange. Front-month futures are up almost 80 percent from a 12-year low earlier this year. Brent, the marker for more than half the world’s oil, was at $48.61 a barrel in London.

Goldman’s expectation for the market to return to a surplus in 2017 reflects the view that low-cost producers will continue to drive output growth, boosted by Saudi Arabia, Kuwait, the U.A.E. and Russia, the bank said.

“While the physical barrel rebalancing has started, the structural imbalance in the capital markets remains large,” the analysts wrote. “The industry still has further to adjust and our updated forecast maintains the same 2016-2017 price level that we previously believed was required to finally correct both the barrel and capital imbalances, and eventually take prices to $60 a barrel.”

To contact the reporter on this story: Serene Cheong in Singapore at scheong20@bloomberg.net To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net Ovais Subhani

Copyright 2016 Bloomberg News.

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