Goldman Sachs Reduces Oil Price Target to $70-$85

Oil Price Predictions

Goldman Sachs has reduced its predicted range for Brent oil prices by $5 to $70-$85 per barrel. This move follows a similar action by Morgan Stanley last week. The reason cited for this reduction is a combination of weaker Chinese oil demand, high inventories, and increasing U.S. shale production. However, the primary driver for the cut is the belief that OPEC will increase production in Q4.

Factors Influencing Price Reduction

Goldman's commodity analyst, Daan Struyven, believes that OPEC's increase in production could potentially shift the market from a spot balance equilibrium to a more long-run equilibrium. This shift would focus on strategically disciplining non-OPEC supply and supporting cohesion. Struyven also noted that prices could significantly undershoot in the short term if OPEC were to strategically discourage US shale growth more forcefully, or if a recession were to reduce oil demand.

Inventory Stability and Demand Growth

Contrary to expectations of summer draws, OECD commercial inventories have been stable. This stability is due to US liquids supply exceeding expectations due to ongoing efficiency gains and a 0.7mb/d YoY surge in NGL supply. Additionally, China's demand growth has slowed due to structural road fuel switching and petrochemical demand weakness.

Future Oil Price Predictions

Despite expectations of higher US supply and lower China demand growth, Goldman Sachs predicts oil prices to decline only modestly in 2025. This prediction is based on solid OECD and India demand limiting the uptick in the 2025 surplus forecast to 0.6mb/d (vs. 0.5mb/d). Lower interest rates and a normalization in valuation should also limit downward price pressure.

Downside Risk and Volatility

Goldman Sachs warns of downside risk to prices and upside risk to volatility due to high spare capacity, potential trade tensions, and the possibility that OPEC may fully reverse the extra cuts in 2025. As a result, the bank has adjusted its fair value estimate for Brent by $2/bbl to $70/bbl. This adjustment is based on efficiency gains from US shale producers, an upgrade in peak production on the GS Top Projects curve, and the view that cheaper global natural gas from 2026 will reduce oil demand growth.

Morgan Stanley's Predictions

Morgan Stanley has also recently revised its oil price forecasts downward, reflecting expectations of increased supply from OPEC and non-OPEC producers amid signs of weakening global demand. The bank now anticipates that while the crude oil market will remain tight through the third quarter, it will begin to stabilize in the fourth quarter and potentially move into a surplus by 2025.

Bottom Line

While the market sentiment is decidedly bearish, with bullish positioning in oil at an all-time low, the most likely direction for prices from this point onward is higher. What do you think about these recent developments in the oil market? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.