Goldman Sachs draws a line on oil prices: "Lower limit 75, upper limit 90", a "big gap" will appear in the market in the third quarter

Despite the heavy blow to the interest rate cut expectations from the non-farm payroll last week, combined with the gradual withdrawal of key OPEC+ member countries from the "voluntary production cut" plan, oil prices resisted heavy pressure this week, sweeping away the gloom of three weeks of consecutive declines overnight, with WTI crude oil rising by more than 3% and Brent crude returning to the $80 mark!

What exactly happened?

WTI rebounded to above $78 per barrel

Goldman Sachs stated in its latest research report that with the peak season for summer road trips approaching, a "significant" gap in crude oil supply may emerge due to a surge in fuel demand, reaching 1.3 million barrels per day in the third quarter. Therefore, Brent oil prices may rise to $86 per barrel in Q3.

Looking ahead for the whole year, Goldman Sachs drew a "upper and lower boundary" for oil prices, stating that after a sharp rise in oil prices in the first quarter of this year, with the fading of geopolitical risk premiums, Brent oil has fallen to $80 per barrel. Based on this, they insist that oil prices will remain in the range of $75-90 per barrel in 2024.

$75 "lower limit": Strong summer demand, China-US inventory replenishment, financial demand return, OPEC "holding" the bottom line

1. Peak season for US road trips

Regarding $75 as the bottom price for Brent oil this year, Goldman Sachs wrote that data shows a strong start to this year's summer tourism season in the United States, with historically high air passenger traffic and strong aviation fuel demand in July. Therefore, it is expected that the crude oil supply gap in Q3 may reach a high of 1.3 million barrels.

2. Oil price decline, China and the US take the opportunity to replenish inventories

Goldman Sachs stated that when oil prices fall, demand from China and the US Strategic Petroleum Reserve (SPR) tends to increase. Typically, when Brent oil prices fall below $85 per barrel, China seizes the opportunity to replenish its reserves. In addition, with recent diesel prices falling below Asian natural gas prices, some transport trucks may switch from natural gas to diesel.

Regarding the replenishment of the US Strategic Petroleum Reserve (SPR), the US Department of Energy announced last week that from September to December, the SPR will tender for 6 million barrels of crude oil, confirming that a drop in oil prices will stimulate inventory replenishment. Goldman Sachs analysis shows that for every $10 drop in WTI, the average monthly replenishment of the Strategic Petroleum Reserve increases by about 1.5 million barrels.

3. Return of financial demand

A decline in oil prices may help speculative positions, which are currently at very low levels, return to normal levels, and a significant increase in financial demand may sustain oil prices. If the net managed money positions of crude oil and related products can return to the average level since 2022 within 6 months, financial demand will increase by 1.5 million barrels per day. 4. OPEC "holds" the bottom line

Although 8 key OPEC+ member countries are gradually withdrawing from the "voluntary production cut" plan, OPEC+ has reached a preliminary agreement to extend its production cut policy until 2025, further limiting the possibility of a sharp decline in oil prices.

Furthermore, a price drop will affect oil supply, which will in turn "counteract" oil prices. Goldman Sachs stated that for every 10% drop in oil prices, U.S. crude oil supply will decrease by about 1%. Moreover, the recent drop in oil prices has already led to the lowest level of U.S. crude oil drilling since January 2022.

$90 "Ceiling": OPEC+ key member countries withdraw from "voluntary production cut", inventory exceeds expectations

Goldman Sachs believes that assuming no geopolitical risks impacting oil supply, the upper limit price for Brent crude oil this year is $90 per barrel.

Considering that OPEC has indicated a data-dependent stance, stating that once the market begins to tighten, they will gradually withdraw from the "voluntary production cut" plan starting from the fourth quarter, thus bearish for oil prices:

Although the clear production cut plan further reduces the possibility of a full-scale price war and supports the view that oil prices will stabilize within a certain range, the current range clearly leans towards downside risks.

In addition, crude oil inventories are not very "cooperative" either. Goldman Sachs stated that commercial crude oil inventories in the Organization for Economic Co-operation and Development (OECD) exceed their expectations.