Goldman Sachs revised its oil price forecasts Monday, catching the market off guard during a surge in crude prices driven by rising geopolitical tensions in the Middle East.
The commodities team, led by Daan Struyven, cut its forecast range for Brent crude by $5 per barrel. The move sets a new range of $70 to $85. The 2025 average Brent price forecast has also been lowered to $77 per barrel from a previous estimate of $82.
This downward adjustment reflects surprising increases in OECD (Organization for Economic Co-operation and Development) inventories, ongoing challenges in China's demand and a reduced fair value estimate for long-dated prices, according to the firm.
Goldman's analysts noted that "Brent oil prices have continued to fluctuate within our prior $75-90 range this summer." This is largely due to the market's oscillation between fears of supply disruptions due to geopolitical risks and concerns over weakening demand, particularly in Western countries and China.
China's Oil Demand Falters, US Supply Surprises To The Upside
A critical factor in the revised outlook is the slower-than-anticipated demand growth from China. Goldman Sachs now expects China's oil demand growth to slow to just 0.2 million barrels per day (mb/d) in the first half of 2024, with negative year-over-year growth expected during the summer of 2024.
On the supply side, the U.S. continues to outperform expectations. August data indicates that crude oil production in the U.S. Lower 48 states has increased to 11.25 million barrels per day, which is 0.2 mb/d higher than Goldman's earlier projections.
"U.S. supply of crude oil and natural gas liquids (NGLs) is beating expectations," Struvyen said.
The bank attributes this to operational efficiency gains among U.S. producers, which have enabled a quicker pace of new well development. These efficiency gains contributed to many public U.S. oil producers exceeding their second quarter 2024 guidance by approximately 3%.
Despite this robust U.S. supply, Goldman Sachs still sees "upside risk to oil implied volatility." The report highlights potential short-term inventory volatility, geopolitical uncertainties, and the possibility of falling Iranian supply as key factors that could lead to higher volatility in oil prices.
Downside Risks To Oil Prices
The bank's forecast for the fourth quarter of 2024 sees Brent crude at $81 per barrel, with prices expected to decline modestly to $74 per barrel by December 2025.
Goldman warns that oil prices could fall below these levels if certain downside risks materialize.
"The risks to our $70-85 range skew to the downside given high spare capacity, potential trade tensions, and the possibility that OPEC may fully reverse the extra cuts in 2025," the report said.
For instance, if China's oil demand remains flat at the current estimate of 15.8 mb/d, Brent could drop to $60 per barrel by December 2025.
Similarly, a 10% across-the-board tariff on U.S. goods imports could push Brent down to $63 per barrel, while a full reversal of the 2.2 mb/d of extra OPEC cuts could see prices fall to $61 per barrel.
Goldman Sachs also explores more severe downside scenarios, including a moderate global recession. In such a case, if OPEC responds with production cuts, Brent could see a steep decline of $30 per barrel from the baseline. Another scenario involves the U.S. Federal Reserve pausing interest rate cuts in 2025 due to higher core inflation, driven by trade tariffs, which could cause a $19 per barrel drop from the baseline.
Short-Lived Libya Disruption, OPEC To Unwind Production Cuts
The bank's updated oil outlook includes an assessment of the recent oil rally.
On Monday, oil prices, as monitored through the United States Oil Fund USO, spiked by 3% amid driven by tensions between Israel and Hezbollah and production disruptions in Libya.
Libya's eastern government has signaled potential production shutdowns due to conflicts with the western government, which could reduce output by 0.6 mb/d in September and 0.2 mb/d in October, according to Goldman Sachs.
Goldman Sachs analysts assume these disruptions will be short-lived, given the incentives of both governments to resume production.
Looking ahead, Goldman expects OPEC+ to start unwinding the 2.2 mb/d of extra voluntary cuts that were announced earlier. Saudi Arabia, in particular, is expected to gradually increase crude production from just under 9.0 mb/d to slightly over 9.2 mb/d by December 2024.
