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Goldman says the bullish case remains intact for oil, as commodity bounces off worst session since October

Oil bulls, hold your ground.

That was the message from Goldman Sachs analysts, who said the oil market is undersupplied and facing more volatility, at the end of a week that’s set to deliver the commodity’s worst losses since August.

“Net, our bullish view remains unchanged: the oil deficit remains unresolved, the current strength in oil demand remains a near-term tailwind and the increasingly structural nature of the deficits will require much higher long-dated oil prices,” said a Goldman team led by Damien Courvalin, in a note dated Nov. 4.

Oil contracts tumbled Thursday after the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, kept crude production increases in place, defying pressure from the administration of U.S. President Joe Biden to get more supply flowing.

“The now open disagreement between OPEC and the U.S. administration, the threat of an SPR [Strategic Petroleum Reserve] release and the potential resumption in negotiations with Iran will nonetheless increase the volatility in oil prices in coming weeks, especially as trading liquidity falls into year-end,” said Couravlin and his colleagues.

But they said even if the U.S. tapped its emergency oil supplies, such a move would be of “modest and temporary help and could in fact backfire given the structural nature of the oil market deficits starting in 2023.”

Couravlin said the analysts’ favored bullish oil trade now is a long Dec-22 contract, which offers “the best return vs. volatility trade off as perceived near-term bearish risks (COVID, OPEC, Iran, U.S. SPR) would only further delay the required ramp-up in investment and exacerbate the structural deficits that we forecast starting in 2023.” The bank has a $90-a-barrel end-2021 forecast for Brent crude.

On Friday, West Texas Intermediate crude for December delivery CLZ21, +1.05% CL00, +1.05% climbed $1.32, or 1%, to $79.86 a barrel. Thursday’s action saw crude tumble 2.5% to settle at $78.81 a barrel on the New York Mercantile Exchange. Front-month contract prices saw the lowest finish since Oct. 7, according to Dow Jones Market Data.

For the week so far, WTI is down 5.6%, which already marks the worst return since a 6.7% drop in the week ending Aug. 6, according to FactSet.

January Brent crude BRN00, +0.76% BRNF22, +0.76%, the global benchmark, was up 17 cents to $80.70 a barrel. Brent tumbled 1.8% to $80.55 a barrel on Thursday, its lowest level since Oct. 1. Down 3.8% so far this week, the contract is also looking at its worst weekly performance since the week ending Aug. 6, when it fell 7.8%.

At its Thursday meeting, OPEC said it would raise the monthly overall production by 400,000 barrels a day in December, a decision that analysts said wasn’t a big surprise. Its next meeting will be Dec. 2.

Biden has blamed Russia and OPEC for surging U.S. gasoline prices, calling on the cartel and its allies to pump more oil.

Prices for several petroleum products were on the rise, with December gasoline RBZ21, -0.10% up 0.8% to $2.312 a gallon and December heating oil H HOZ21, +0.94% up 0.8% to $2.427 a gallon.

The December natural-gas futures NGZ21, -2.61% contract fell nearly 2% to $5.715 per million British thermal units.
Source: Market Watch

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