Goldman Sachs on the current rise in oil prices: driven by both supply and demand, but short-term adjustments are needed

Goldman Sachs believes that the increase in physical oil demand, instability on the supply side, and market expectations of future supply-demand gaps are the main factors driving the recent rise in oil prices.

Goldman Sachs stated that although oil prices may continue to rise in the short term due to supply constraints, in the long term, the increase in global oil inventories and market over-expectations of prices may bring downward risks.

Multiple factors driving oil price increase

With tensions in the Middle East, Brent crude oil prices have surged to a five-month high.

Goldman Sachs stated in a research report that the main driving force behind this phenomenon is the bullish outlook on the fundamentals of the physical oil market. From the demand side, the better-than-expected performance of the United States, China, and manufacturing Purchasing Managers' Index (PMI) indicates signs of a reversal in the manufacturing cycle, while new forecast data in Europe also shows resilience. These positive economic indicators suggest growth in oil demand.

On the supply side, according to Goldman's report, crude oil production in the Lower 48 region of the United States is nearly 400,000 barrels per day lower than the peak in December last year, and Russia's refining capacity has decreased due to continuous drone attacks since January, with its liquid oil production forecast to decline to 10.2 million barrels per day.

Goldman believes that disappointing crude oil production indicated by U.S. pipelines, along with the decline in Russia's liquid oil production and the increasing risk of more attacks on Russia's oil infrastructure, have exacerbated market concerns about supply constraints.

At the same time, Goldman stated that market expectations of future supply-demand gaps also impact oil prices.

Goldman expects a crude oil supply-demand gap of 350,000 barrels per day in the second quarter, and although there are upside risks, considering the uncertainties in U.S. and Russian supply, as well as overestimation of time spreads and excessively speculative positions, oil price consolidation remains the base case.

Future trends and risks of oil prices

Goldman also stated in the research report that in the short term, the tense situation of oil prices is reflected in the spread between physical oil prices and futures prices (i.e., crude oil basis differentials). The average crude oil basis differential has risen significantly, especially the increase in Dubai crude basis differentials, indicating a significant tension in medium-grade crude oil. In addition, the average crude oil basis differential has now caught up with the immediate price differential in the physical oil market.

In the long term, although global commercial oil inventories have increased by 600,000 barrels per day in the past 90 days, mainly driven by the growth of offshore oil inventories in emerging market countries, this may eventually reduce tension onshore.

Goldman also stated that the total commercial oil inventory forecast for OECD member countries was 27 million barrels lower than expected at the end of March, which will exacerbate short-term supply constraints.

Regarding the future trend of oil prices, Goldman mentioned some potential risk factors in the report. For example, the Brent 1/36M time spread is 5 percentage points higher than fair value, which may indicate market over-optimism about future oil prices. In addition, Goldman Sachs believes that the net crude oil positions managed by funds have increased significantly to 626 million barrels this week, mainly driven by crude oil and gasoline, which may increase market volatility.