American investment banking giant Goldman Sachs has issued a warning that the global oil market is set to experience record-high demand, significant deficits, and higher crude prices in the foreseeable future. Speaking on CNBC’s news show “Squawk Box Asia”, Goldman’s head of oil research, Daan Struyven, highlighted the bank’s expectation of “sizable deficits” in the second half of this year as demand reaches an all-time high.
According to Goldman Sachs, Brent crude, a major benchmark, is expected to rise from its current level of just above $80 per barrel to $86 per barrel by the end of the year. Struyven also noted that while US crude production has increased significantly in the past year, the growth rate is anticipated to slow down for the remainder of 2023 due to a decline in the number of rigs. Last week, it was reported that the US oil rig count fell to the lowest level since March 2022.
Furthermore, Struyven pointed out that the failure of the G20 energy ministers to reach a consensus on phasing out fossil fuels at a recent summit in India indicates significant uncertainty about long-term oil demand. This uncertainty, coupled with the low rig count, is expected to contribute to the rise in crude prices and large deficits in the oil market.
The International Energy Agency (IEA) also recognized the tightening of oil markets in the second half of the year. In its latest report, the agency revised down its global oil demand growth projections. However, IEA head Fatih Birol suggested that these projections could potentially be revised upward based on the economic growth of China and other countries.
Oil prices experienced a rally for most of 2022, partially due to western sanctions on major producer Russia. However, prices dropped significantly towards the end of the year due to factors such as a mild winter in Europe and a decline in global economic activity.
To address the fluctuation in oil prices, OPEC+ (comprising OPEC and allies including Russia) agreed in October to cut output by approximately 2% of world demand from November 2022 until the end of 2023. The group later agreed to further curbs to balance prices.
As of Monday, Brent crude futures were trading at over $81 a barrel, while US West Texas Intermediate (WTI) futures stood at $77.5.
The warnings issued by Goldman Sachs and the IEA signify the growing uncertainty in the global oil market. The low rig count, coupled with the failure to reach a consensus on phasing out fossil fuels, is projected to drive prices higher and result in significant deficits in the near term. These factors influence the expectations of investors and industry experts, and their impacts are likely to be seen in the coming months.