Even as crude prices largely tumbled into a bear market this week, Goldman Sachs says investors can count on the world’s biggest oil cartel to keep a floor under the commodity in 2024.
“We believe that OPEC [Organization of the Petroleum Exporting Countries] will ensure Brent in a $80-$100 range by leveraging its pricing power, with a $80 floor from the OPEC put, and a $100 ceiling from spare capacity,” said a team of Goldman commodities analysts led by Daan Struyven, in a note to clients on Thursday.
On Thursday, December West Texas Intermediate crude
fell $3.76 per barrel, or 4.9% to $72.90 — a 22.18% drop from a 52-week high of $93.68 reached on Sept. 27, according to Dow Jones Market Data. A drop of 20% or more from a recent high meets one definition of a bear market.
January Brent crude
fell $3.76 per barrel, or 4.63% to $77.42 on Thursday. Technically just shy of a bear market, that marked a 19.81% fall from a 52-week high of $96.55 on Sept. 27.
Both contracts settled at the lowest seen in more than four months on Thursday, driven by worries over ample supply and weak demand. Prices rose modestly on Friday.
Brent and WTI crude have each fallen more than 8% this year, which Goldman blames on “much stronger than expected” non-core OPEC supply. They site two factors: a “one-time boost” to U.S. production growth caused by a post-pandemic ease in supply constraints for rigs, parts and workers; and supply from specific sanctioned in economies exceeding expectations in 2023.
But these factor should fade, says the bank, with non-core supply growth slowing to 1.5 million barrels per day in 2024 from 2.5 mb/d this year, notably in the U.S. Amid solid demand, they expect a net 0.7 mb/d deficit in 2024 versus a 0.3 mb/d deficit in 2023.
“We thus expect the oil market — which is now only slightly tighter than usual based on the level of OECD commercial stocks — to tighten at a moderate pace, but preserve significant capacity to handle near-term tightening shocks,” said Struyven and co. “While this spare capacity effectively delays the next oil super cycle, it doesn’t necessarily prevent it, given how tight long-term supply drivers of future tightness look.”
Goldman sees Brent unlikely to “sustainably drop” below $80 a barrel for several reasons, the first being so-called OPEC puts. A put option gives the holder the right, but not an obligation to sell a specific number of securities at a specified price within a specified time. Call options work the opposite way.
An OPEC put refers to what the cartel sees as an ideal selling price for crude, which Goldman sees between $80 to $85 a barrel, based on production cuts in October 2022, April and June 2023.
“While the rise in spare capacity implies that this put is less strong than a year ago, we believe that a sustained drop below $80 would likely lead OPEC+ to bring back barrels more slowly,” said the analysts.
A second reason oil is likely to stay above $80 is due to a soft landing for the global economy where core inflation will return to target without much damage to the labor market or oil demand. And thirdly, when prices fall, U.S. net public and private demand for oil rises, said the analysts.
But they say any sustainable rise above $100 per barrel for oil in the next year is unlikely, due in part to ample spare capacity and China destocking its crude inventories. Struyven said they also expect OPEC will pursue backwardation when near-term oil prices trade higher than future ones.
And Goldman’s cheerier outlook for oil prices might be welcome news for bulls, as the market has been slipping into the opposite of backwardation — contango — when the forward price of a futures contract trades lower than the spot price.