Goldman Sachs reiterates bullish oil outlook on likely steep OPEC+ cut
Quantum Commodity Intelligence – Reports indicating that OPEC+ is considering a production cut potentially larger than 1 million has reinforced Goldman Sach's firm outlook for crude oil, the bank said Wednesday.
Goldman said while such a cut would occur amid one of "the tightest markets in recorded history", and ahead of a potential decline in Russian exports later this year, such a decision could be justified by the recent large decline in prices, adding prices were down 40% since their June peak amid mounting global growth concerns.
"The collapse in investor participation, driving liquidity and prices lower, is also a likely strong catalyst for such a cut, as it would increase the carry in oil and start to claw back investors who have instead turned to USD cash allocation following the aggressive Fed hikes," added the bank in its latest investor report, authored by Damien Courvalin, Callum Bruce, Jeffrey Currie and Romain Langlois.
The investment bank noted that such a cut had not been assumed in its most recent balances published in late September, while such an OPEC+ cut would reinforce its bullish price view and help limit the downside to prices should economic growth disappoint.
"As a result, we reiterate both our bullish oil view as well as our preference for long crude timespread positions into year-end."
Last week the investment bank's energy research desk cut its Q4 2022 forecast by $25/b to $100/b, while its 2023 Brent forecast was down by an average of $17.50/b from before.
Exodus
Goldman said that beyond the decline in prices, it believes a significant cut could help remedy the large exodus of oil investors that has left prices under-performing both fundamentals and other cyclical asset classes
"While such hedging flows have slowed materially this year, the investor exodus has been even larger owing to the surge in price volatility, exacerbating backwardation - and hence the compensation for long investors - in energy futures," said the report.
It added that an OPEC cut, by reinforcing this level of backwardation, would further increase the carry offered by a long passive front-month rolling position in Brent futures, which already offers an annualized carry of 24%.
The bank further added that the OPEC producer group, dominated by core Middle East producers, is exercising its pricing power, assuming such a cut does happen.
"This is ultimately a return to the Old Oil Order, where core-OPEC acts under the rational behavior of a dominant producer with pricing power. In that sense, while exceptional, this cut is also logical as it maximizes the group's revenues today with minimal sacrifice of future profits."
