Oil prices jump after long-time bear Goldman says market has flipped into deficit

An employee holding a gas pump to refill a car at a petrol station in central Seoul, in this April 6, 2011.
An employee holding a gas pump to refill a car at a petrol station in central Seoul, in this April 6, 2011.PHOTO: REUTERS

SINGAPORE (BLOOMBERG, REUTERS) - Oil prices jumped over 1 per cent on Monday (May 16) after long-time bear Goldman Sachs said the market had ended almost two years of oversupply following global oil disruptions and flipped to a deficit sooner than expected.

West Texas Intermediate crude, the US benchmark, rose 1.6 per cent to US$46.96 a barrel by 10:25 am Singapore time on the New York Mercantile Exchange. Front-month futures are up almost 80 per cent from a 12-year low earlier this year. Brent, the marker for more than half the world's oil, was at US$48.61 a barrel in London.

Supply disruptions from Nigeria, Venezuela, the United States and China triggered a U-turn in the oil outlook of Goldman Sachs, which long warned of overflowing storage and another looming crash in prices.

"The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," Goldman said, adding that the market "likely shifted into deficit in May ... driven by both sustained strong demand as well as sharply declining production."

That's prompted the bank to raise its US crude price forecasts to US$50 a barrel for the second half of 2016 from a $45 estimate in March.

The unexpected outages caused by everything from wildfires in Canada and pipeline attacks in Nigeria will keep the market in deficit through the second half of this year, according to Goldman.

Still, the return of some of the output and higher- than-expected US, North Sea, Iraq and Iran production means the bank predicts the shortfall will be at 400,000 barrels a day versus 900,000 that was previously expected.

A shift back to a surplus is seen in early 2017, it said.

"The physical rebalancing of the oil market has finally started," the Goldman analysts wrote. The changes to forecasts "reflects our long-held view that expectation for long-term surpluses can create near-term shortages and leaves us cyclically bullish but long-term bearish."

Goldman cut its crude price forecast for the first quarter of 2017 to US$45 a barrel from US$55 previously, but sees oil rising to US$60 by the end of that year. The bank expects global oil demand to grow by 1.4 million barrels a day in 2016, versus 1.2 million predicted earlier.

Goldman's expectation for the market to return to a surplus in 2017 reflects the view that low-cost producers will continue to drive output growth, boosted by Saudi Arabia, Kuwait, the U.A.E. and Russia, the bank said.

"While the physical barrel rebalancing has started, the structural imbalance in the capital markets remains large," the analysts wrote. "The industry still has further to adjust and our updated forecast maintains the same 2016-2017 price level that we previously believed was required to finally correct both the barrel and capital imbalances, and eventually take prices to US$60 a barrel."