Goldman Sachs: $90 a Barrel Likely Ceiling for Brent Crude

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Bloomberg Apr 18 03:53 · 22k Views

Daan Struyven, Goldman Sachs head of oil research, says that if there are not any new geopolitical tensions, the path of least resistance for oil is to drift lower. He speaks on Bloomberg Television.

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Transcript

  • 00:00 Give us perspective on the oil inventories today and is that the leading driver for the sell off that we're seeing.
  • 00:06 So
  • 00:06 the oil inventory's data were somewhat higher
  • 00:09 than expected
  • 00:10 but well within the range of sort of week to week surprises.
  • 00:13 The data tend to be quite noisy.
  • 00:14 So I think to explain the two 2 to 3% sell off,
  • 00:18 I think you want to point to two other factors.
  • 00:20 The fact that in an environment where the geopolitical risk premium is high 5 to $10 per barrel,
  • 00:25 if you don't get headlines with a materialization
  • 00:28 of the geopical risk, I think the path of least resistance for that premium
  • 00:32 is to drift,
  • 00:33 drift lower.
  • 00:34 Second, as you reported earlier today, there were some headlines that some of the marginal refiners in Asia
  • 00:40 are reducing their demand for crude
  • 00:42 because their margins have been eroded as a result
  • 00:45 of the rise in crude prices, sort of a self stabilizing
  • 00:49 mechanism.
  • 00:50 And then I think
  • 00:50 those 3 catalysts
  • 00:52 were were amplified by
  • 00:54 algorithmics,
  • 00:55 CTA's
  • 00:56 selling.
  • 00:57 And I think, big picture, I think we're learning that
  • 01:00 in our central case of no geopolitical
  • 01:03 hits to supply, $90.00 per barrel should be
  • 01:07 a ceiling on on brand prices this year.
  • 01:09 Are we under estimating that risk, though?
  • 01:11 So the headlines across the top of the hour was that
  • 01:13 according to the US, Venezuelan oil and gas transactions must wind down now by May 31st.
  • 01:18 So they issue a new general license on Venezuelan oil and gas sanctions that was lifted for six months to see if Maduro could kind of free up elections little bit.
  • 01:26 And it looks like we're going to reimplement some form of that the same time where there's going to be pressure on the administration do something about Iran, which is producing, what, three and a half million
  • 01:34 barrels of oil a day #4.
  • 01:36 So
  • 01:37 I mean, do we need to price this though back in a little bit more.
  • 01:40 I do think that the current
  • 01:42 level of oil prices does incorporate a significant
  • 01:45 downside risk to supply, especially in
  • 01:48 countries in the Middle East and sanctions economies such as such as Iran.
  • 01:52 I think 1 interesting observation is that over the last two years, supply in both Iran and Venezuela has increased a lot.
  • 01:59 You're up roughly 20%
  • 02:00 over the past two years
  • 02:02 in in Iran.
  • 02:04 Of course the geopolitical escalation in the Middle East and potentially also a change
  • 02:09 in US
  • 02:10 you know federal policies I think skewed the risks to Iran supply
  • 02:14 to the downside.
  • 02:15 And our view is that the market is,
  • 02:17 is
  • 02:17 rising in that downside risk to.
  • 02:19 Well that's what I'm curious about because right now I mean you have Congress considering additional sanctions on Iran oil and I'm wondering if that's even going to matter.
  • 02:27 I mean, if we know that the net effect of what the US tried to do, particularly after the Russian invasion, kind of,
  • 02:32 I mean to a certain extent backfired, if you will,
  • 02:34 what does additional sanctions do with anything?
  • 02:38 Yeah, I think you would have to see a very significant
  • 02:40 change in sanctions policy to see a large drop in Iran supply.
  • 02:44 It has happened before.
  • 02:45 In 2018, we saw a pretty big drop
  • 02:48 in
  • 02:48 in supply in Iran.
  • 02:50 At this point,
  • 02:51 80 to 90% of Iranian exports are going to China, to the Chinese teapot
  • 02:57 refiners.
  • 02:58 How much does the
  • 02:59 well on that side and particularly on the demand side coming out of China?
  • 03:03 How much does the health of their economy
  • 03:05 matter to that forecast?
  • 03:08 So China continues to be the largest contributor to global oil demand growth.
  • 03:12 In our forecast,
  • 03:13 roughly 1/3
  • 03:15 of the solid one and a half million barrels per day, 24 oil demand growth that we forecast is coming from China.
  • 03:20 That is
  • 03:21 fast, but much less fast
  • 03:23 than last year.
  • 03:24 The reopening boost to gasoline demand is behind us
  • 03:27 but
  • 03:27 the demand
  • 03:28 from
  • 03:29 from China for
  • 03:31 Petro chemical products as they are ramping up their capacity to produce plastics continues to rise
  • 03:35 at A at a pretty, pretty rapid clip.
  • 03:37 I would say that the oil demand data
  • 03:39 in China and Q1 have
  • 03:41 disappointed
  • 03:42 our our in market expectations
  • 03:44 somewhat.
  • 03:45 What do you think would be a scenario that gets us to 100?
  • 03:48 That question would have looked not at all crazy last Friday.
  • 03:51 Yes,
  • 03:52 I still think it's a, you know, a key risk to
  • 03:55 to watch.
  • 03:56 Two key upside risks to our view that $90.00 per barrel is a ceiling on brands
  • 04:00 #1,
  • 04:02 the possibility of
  • 04:03 a longer extension of OPEC plus cuts.
  • 04:06 In our base case we have OPEC plus production
  • 04:09 starting to gradually rise in the third quarter because spare capacity is very high,
  • 04:14 prices have risen and speculative position has risen, all factors that usually predict
  • 04:18 increases.
  • 04:19 If that doesn't happen,
  • 04:21 you know you could move higher into the 90s
  • 04:23 and perhaps even to 100.
  • 04:24 The second key risk of course is
  • 04:26 geopolitical shocks to supply,
  • 04:29 whether it's in the Middle East, in Russia, it could be production refineries as we saw in Russia
  • 04:33 or
  • 04:34 transportation infrastructure
  • 04:37 including
  • 04:38 over water.
  • 04:39 What are the, what's the option market doing like
  • 04:41 are we seeing any options to 100 or more, Like
  • 04:45 are there some hedging of the bets for higher oil?
  • 04:48 So last week, especially on Thursday and Friday, we saw a very big jump in demand for
  • 04:53 insurance call options against very significant oil price spikes
  • 04:57 and I think that also helps to explain why the market.
  • 05:00 Reaction to
  • 05:01 Iran's direct attack of Israel was so muted,
  • 05:04 I think you could infer from the options market
  • 05:06 that the move was anticipated
  • 05:09 and quite well telegraphed by financial market participants.
  • 05:12 So as we get,
  • 05:13 as we get deeper into the year, particularly with some of the seasonal factors, do you think
  • 05:16 that the market positioning around those prices will change significantly?
  • 05:20 So from a seasonal perspective, the summer tends to be the strong demand season both because of the driving season in the US and Europe
  • 05:27 and because in the Middle East
  • 05:28 for
  • 05:29 AC for air conditioning demand
  • 05:30 you you burn more, more oil
  • 05:33 And so you know I think that Q3 should probably be the the strongest quarter from a demand
  • 05:39 perspective.
  • 05:41 I think positioning is is less is less seasonal.
  • 05:44 We have seen a very big pickup in speculative positioning, basically an increase of 400 million barrels
  • 05:49 since the lows in December,
  • 05:51 which I think explains much of the rally.
  • 05:53 If we look at fundamentals over the last year, the level of visible global stocks
  • 05:58 has been basically been
  • 05:59 flat
  • 06:00 as a pancake
  • 06:01 despite very big swings
  • 06:03 in oil prices.
  • 06:04 And in our view,
  • 06:05 as long as you're in this range bound fundamental environment where you have high OPEC spare capacity, where OPEC gives you a floor
  • 06:12 but also a ceiling because of high spare capacity, our recommendation to clients is when you're at the top end of the range,
  • 06:18 you turn more cautious.
  • 06:19 When
  • 06:19 you're at the lower end of the range, you go along.
  • 06:22 The one nuance to this view is that we're in a very uncertain geopolitical environment and I think that the hedging value against your political shocks
  • 06:30 both from oil but also gold remains a ring is very significant.