Oil Soars To 7 Year High As Goldman Sees Brent Hitting $105 In 2023

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by Tyler Durden
Tuesday, Jan 18, 2022 - 03:09 PM

It's a bloody day for risk assets, with tech names plunging, yields surging, and even that "industrial bellwether", the Dow Jones, set for a big drop with two of its four biggest constituents - Goldman (#2 at 7% weight) and Microsoft (#4 at 5.7% weight) - sinking on poor earnings and a whopper of an acquisition, respectively. But not everything is tumbling: oil just hit the highest price since 2014..

... barely a few weeks after a panicking Joe Biden, who realizes that surging inflation will destroy his presidency...

... released oil from the US strategic petroleum reserve, a move which we and many others warned is catastrophically stupid, even for someone with Joe's cognitive abilities.

And while we wait for Biden's next, even dumber, move to send oil shooting to all time highs, there is nothing but upside for black gold amid what appears to be a perfect storm of bullish news, starting with strained supplies which make physical markets run hot  in Asia, the world’s largest consuming region, which along with geopolitical tensions and persistent supply concerns have helped spike crude prices. As Bloomberg reports, the physical crude market in Asia is showing further signs of strength, bolstering the outlook for higher futures prices, while yesterday's drone attack on the UAE by Iran-backed Yemeni fighters has ratcheted up security risks in the oil-exporting region at a critical time.

Then there was news that Russia may be able to deliver only about half of its scheduled increases in crude production over the next six months, followed by an announcement from energy giant Exxon Mobil in which it described an “ambition” to eliminate greenhouse gas emissions from its operations by 2050, the first time the oil giant has made such a long-term pledge on carbon, an ESG promise which explicitly suggests even more output will be trimmed in coming decades.

At the same time, in its monthly oil report, OPEC said it expects global oil markets to remain “well-supported” this year by robust demand and with stockpiles considerably below their 5-year average, the market’s strength will persist, even as central banks tighten monetary policy: “The impact of the omicron variant is projected to be mild and short- lived.”

Last but perhaps most important, Goldman published a report late on Monday in which the bank's commodity strategist, Damien Sourvalin, hiked his brent price target to $96 in 2022 and $105 in 2023, because according to the bank, those are the prices "required to reach necessary spare capacity and stock builds."

Below we excerpt some more from the Goldman report:

Robust fundamentals have reversed last year’s oil price melt-down, with the market remaining in a surprisingly large deficit as the Omicron demand hit is so far smaller (and likely briefer) than that of Delta exc. China.

While the hit to Chinese demand will be large due to its zero-Covid policy (-0.5 mb/d in 1H22), we see it offset by strong demand in 4Q21, gas-to-oil substitution and supply disappointments.

Net, we expect inventory draws to narrow but persist through1Q22, with the global surplus in 2Q22 smaller than seasonal at 0.4 mb/d (we are pushing our Iran ramp-up to 2Q23 given the lack of progress on negotiations).

By summer, this will bring OECD inventories to their lowest level since 2000 alongside a decline in OPEC+ spare capacity to historically low levels of c.1.2mb/d. At $85/bbl, the market would remain at such critical levels, insufficient buffers relative to demand and supply volatilities, through 2023.

As the six precedents since 1990 invariably show, consumers attempting to secure physical supply will first drive backwardation steeper, at which point the unwind of producer hedges and consumer forward buying will lead long-dated prices higher, normalizing inventories and spare capacity through the combination of demand destruction and higher supply. We believe the market needs to solve for this once again, with the prospect of long-term shortages leading to near-term surpluses.

At our updated demand and supply elasticities, we model this rebalancing will require long-dated prices rising to $90/bbl, bringing our Brent spot forecast to$105/bbl in 2023 (with 2022 at $96/bbl). At such prices, we estimate that the rebalancing will be achieved through 0.6 mb/d of demand reduction, although to still record high and above consensus levels, with shale growing 0.8 mb/d YoY in2023. We are positioned for such a rebalancing process through our long BrentDec-22 vs. Dec-23 and long Dec-23 Brent trade recommendations.

Importantly, Goldman says that it is not forecasting Brent trading above $100/bbl on an argument of running out of oil as the shale resources is still large and elastic. This mechanism will, however, require "ever rising oil prices given the reluctance to invest in oil during the energy transition and the gradual depletion of shale’s geological, midstream and service capacities."

It's not just Goldman which is warning that much more oil will need to be pumped in the coming months (at much higher prices). According to analytics firm Kayrros, global crude inventories were at 2.834b bbls as of Jan. 9, near the lowest since October 2019. That compares with 3.090b bbls a year earlier. Onshore crude stockpiles have been consistently drawing in the past year, led by declines in China and the U.S. In China, inventories were 923m bbls as of Jan. 9 vs 1.006b bbls a year earlier. This echoes Goldman's observation that the global oil market has been in a larger deficit than even the bank's above consensus forecast, with deficits of -2.4/-1.4/-1 mb/d in November-January, 0.5 mb/d larger than expected, bringing global inventories c.200 mb below their Dec-19 pre-Covid levels.

In short, much to the humiliation and embarrassment of hyperinflation Joe, oil will hit $100 before it hits $70 again.

Meanwhile, those long energy names are are gloating as virtually everything else in the market is crashing: the S&P 500 Energy Sector Index rose 1.4% to its highest level since April 2019. Among the standouts are Occidental Petroleum which posted the biggest gain, rising 3.8%, other notable risers include Devon Energy +3%,  APA Corp +2.6%, ConocoPhillips +2.4% and Exxon Mobil +2.2%, which remarkably still has a dividend yield just shy of 5%.

The full must-read Goldman report is available to professional subs in the usual place.