Goldman Comments On Oil, Sees It Going Back To Recent Highs On "Critically Tight Supply-Demand Fundamentals"
Goldman's David Greely, who for a long time was predicting and hoping for a crash in oil, only to see a margin-hike driven one in silver leading to a massive collapse in the commodity complex, is out commenting once again on his outlook on oil. Not surprisingly, the Goldman analyst's chief fear now is that a contracting economy (which Goldman's economists have largely failed to noticed so far) will lead to further commodity weakness. Yet, in typical Goldman fashion, the commodity pump machine has once again disclosed that in the long-term there is only one way for black gold to go: up. From the just released report: "We continue to see fundamentals tightening over the course of this year, likely pushing prices back to recent highs by next year. It is nevertheless important to reiterate that while we saw recent prices as having risen above the levels consistent with underlying near-term supply-demand fundamentals, we continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market. Consequently, it is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year."
Brent crude oil prices plummeted yesterday (May 5), falling $10.39/bbl to $110.80/bbl as of the NYMEX close, extending the declines of the past three days (Exhibit 1). In our view, the sharp decline resulted from prices pushing ahead of fundamentals in recent weeks, leaving them vulnerable to a substantial correction (see GS Energy Weekly: Prices return to spring 2008 levels, but fundamentals not there yet, April 12, 2011). We believe that the catalysts for the sell-off yesterday were a string of disappointing economic data releases and the May 4 DOE statistics:
- ISM non-manufacturing index dropped sharply to 52.8 from the prior month’s 57.3, one of the largest drops in its history. Particularly troubling was the sharp decline in the new orders index, which fell 11.4 points – the biggest monthly drop in the 14 years of the survey – to 52.7.
- German manufacturing orders fell substantially in March, falling 4.0 percent from the prior month, against the consensus estimate of a 0.4 percent rise. In addition, the ECB left interest rates unchanged and adopted rhetoric that shows less concern about inflation.
- US initial jobless claims jumped to 474 thousand last week from 431 thousand the prior week and a consensus of 410 thousand. While several distortions likely contributed to the increase, the result was still poor. Due to the timing of the survey, this report is more likely to have implications for the May employment report than for today’s (May 6) Non-farm payroll report.
- The Weekly Petroleum Status Report from the US DOE reported that US total petroleum inventories are continuing to make the turn into seasonal builds. Over the past two weeks US total petroleum inventories have built 10.4 million barrels. While US oil demand remains relatively flat, allowing total petroleum inventories to build, extremely low US refinery runs have concentrated the recent builds in crude oil and “other product” inventories, while motor gasoline and distillate inventories continue to draw.
Yesterday’s (May 5) sell-off has likely removed a large portion of the risk premium that we believe has been embedded in oil prices, which suggests further downside may be limited from here. However, we remain wary of potential further downside should economic data releases in coming days continue to disappoint, with the focus now turning to today’s (May 6) Non-farm payroll report in the United States.
It is nevertheless important to reiterate that while we saw recent prices as having risen above the levels consistent with underlying near-term supply-demand fundamentals, we continue to believe that supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan supplies remain off the market. Consequently, it is important to emphasize that even as oil prices are pulling back from their recent highswe expect them to return to or surpass the recent highs by next year.
Translation: we were right, for all the wrong reasons, and now it's time to load up the truck, as we have been doing for a while.
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