Goldman Sachs Has Great News for Oil Investors, but with a Warning

Oil prices have rallied big time in 2019 on the back of production cuts that have led to a decline in the industry’s oversupply levels. There are several indications of the oil price rally continuing in the future, which is why the latest estimate from Goldman Sachs doesn’t come across as a surprise.

Brent crude is now expected to average $66 per barrel this year.

According to Goldman Sachs’ latest forecast, Brent crude is now expected to average $66 per barrel this year. The investment bank’s earlier estimate called for an average Brent crude oil price of $62.50 per barrel. It also raised its average for the WTI crude oil price from $55.50 per barrel earlier to $59.50 per barrel.

Goldman has been encouraged to boost its oil price targets for the year based on the ongoing supply chain actions that are being taken by major oil producers across the globe. The investment bank expects the forward curve of Brent oil prices to shift into backwardation, which indicates that the oil market will remain tight going forward.

Also, Goldman Sachs analysts expect that there will be a supply deficit to the tune of 0.5 million barrels per day in the global oil market during the second quarter of 2019. That’s not surprising as the production cuts pledged by OPEC and its allies are supposed to remain in place until the end of the second quarter.

As it turns out, OPEC and its partners are complying strictly with the cuts. For instance, 11 OPEC members followed a 135% compliance rate in March as compared to 101% in February. In all, OPEC’s production fell to a four-year low during the month of March, according to Reuters.

However, Goldman Sachs anticipates that the oil price rally will eventually lose steam in the second half of the year. According to the investment bank:

While the macro risk-on environment and the threat of disruptions may drive spot prices even higher, we still expect that prices will decline gradually from this summer as shale and OPEC production increases.

Now, the oil price rally in the second half of the year depends on how OPEC and its partners exit the ongoing production cuts. For instance, key OPEC partner Russia has given an indication that it wants to boost its output from the month of June as the country’s energy minister believes that further supply cuts are not needed if the market attains a balance in the second half of the year.

However, there’s a good chance that the oil rally could continue because of supply issues elsewhere across the globe. Oil production in Libya, for example, could be under pressure because of civil war-related violence going on in the country. The country accounts for 1% of the global oil production at 1.1 million barrels per day, but a big chunk of that might be under risk because of the ongoing unrest.

As a result, there’s a good chance that the oil rally could be sustained because of the other events outside of OPEC’s oil production cuts.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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