Goldman says US$40 oil call may be too low as demand surprises

[LONDON] Goldman Sachs Group Inc said it didn't expect oil demand to recover so quickly and its forecast for crude at US$40 a barrel may be too low.

While the bank projects that oil will still reverse its recent advance, the failure of global inventories to increase amid weather-related disruptions and stronger-than-expected demand means there's a risk prices will miss its target for the next two quarters, according to a report dated March 8.

Morgan Stanley also said the oil market was "surprisingly healthy." Global benchmark crude prices rose in February for the first time in eight months, rebounding from an almost 50 per cent loss in 2014 as US production surged to a 30-year high. Sandstorms disrupted Iraqi exports while cold weather in the US and a drought in Brazil bolstered consumption, according to Goldman Sachs.

"The lack of a meaningful build in the past few months leaves risk to our forecast for oil prices remaining at US$40 a barrel for two quarters skewed to the upside," Goldman analysts including Damien Courvalin in New York wrote in the report.

"Weather has played a great part in keeping crude off the market."

West Texas Intermediate crude, the US benchmark, rose as high as US$54 a barrel last month on speculation a recovery in demand was helping shrink a global glut amid a slowdown in US drilling. The April contract was at US$49.79 a barrel on the New York Mercantile Exchange at 7:50 am local time. Brent crude was at US$59.50 in London after touching US$63 a barrel in February.

Goldman forecast in a Jan 11 note that WTI would drop as low as US$40.50 a barrel in the second quarter before rebounding to US$65 in 2016. The bank projected that Brent will slide as low as US$42 and average US$70 next year.

Weather, violence or sanction-related supply disruptions in Iraq, Libya and Iran removed 885,000 barrels a day from the global market in January and February relative to December, according to the bank. Winter consumption also led to stronger- than-expected demand from the Middle East to the US, it said, predicting global consumption growth of 1.35 million barrels a day in 2015.

Weather Changes These bullish conditions may not last as Libyan disruptions peak while a return to normal weather in Iraq may spur a recovery in exports, according to Goldman. At the same time, Russia, Brazil, Saudi Arabia and the US may continue to boost output. The end of winter may lead to a deceleration in demand growth, it said.

"While we reiterate our out-of-consensus view that demand growth will be strong in 2015, on the back of better economic growth and low oil prices, we did not expect demand to be so strong this soon," the analysts said. As leading economic indicators signal activity may weaken "our expectation going forward is therefore for the global crude inventory build to resume," according to the report.

High demand from refiners for crude and supply disruptions in Iraq and Libya meant the market was unexpectedly strong, Morgan Stanley said in an e-mailed report Monday. By the northern hemisphere summer, seasonally weak demand for oil products may prompt an increase in stockpiles and weigh on prices, it said.

WTI may not reach Goldman's forecast of US$65 a barrel in 2016 as US producers prepare to increase activity later this year by raising equity, reducing debt and "building an uncompleted well war chest," according to the report.

"Producers will be better positioned to deliver strong production growth later this year and into 2016, undermining the market re-balancing," it said.

BLOOMBERG