Goldman Sachs: Oil lower due to ‘excessive wall of worries’
12:57, 22 November 2021
Goldman Sachs said that oil has succumbed to an “excessive wall of worries” in a new report sent to Capital.com on Monday.
On 19 November, the bank noted that oil prices had fallen further with Brent below $79 a barrel (bbl). Oil has been weighed down by concerns over the current Covid-19 wave in Europe and the potential return of lockdowns, as seen in Austria.
“We estimate that this move lower has far overshot the actual fundamental risks due to low trading volumes,” the bank said. “Specifically, our pricing model shows that the $8/bbl price decline since late October is equivalent to the market pricing in 4 (million barrels per day) combined hit to demand or increase in supply over the next three months”.
China concerns
Goldman noted the concerns over Chinese growth and said its property sector has likely contributed to the move lower as well.
“While our high-frequency tracker of Chinese oil demand does show demand sequentially declining in recent weeks, it remains up year on year,” the bank said.
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Key takeaways
Goldman in the note said that low liquidity had left the oil market pricing a record large Strategic Petroleum Reserve (SPR) stock release, aggressive lockdowns in Europe and a sharp slowdown in Chinese growth.
“We therefore view the move as excessive, especially as the oil market remains in a large deficit, and reiterate our $85/bbl 4Q21 average forecast,” Goldman said.
In mid-afternoon trade in London, Brent crude was up 0.2% at $79.08 a barrel, while West Texas Intermediate was 0.1% higher at $76.05 a barrel.
Shift in sentiment
Osama Rizvi, an energy analyst and economic analyst at Primary Vision, told Capital.com that oil prices have rallied to multi-year highs recently, however, there remains many headwinds that will check its climb to $100.
“One of the factors, and the most important one, is a shift in sentiment which can occur as talks of SPR takes hold. Furthermore, higher oil prices will incentivise consumers like China and India to tap into their reserves (as China did recently) that will impact import numbers once again changing the sentiment. Lastly, I still believe that US administration will reach some backdoor deal with OPEC which will put some barrels into the market if gasoline prices reach higher - it eats away at the political capital.
“I wrote in July why prices won't touch $100 and they still haven't. I still stand by my thesis. It will take a geopolitical event for oil prices to enter triple digit territory,” Rizvi said.
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