“The rebalancing of the oil market has likely been achieved, six months sooner than we had expected.”
Goldman Sachs (NYSE:GS) dramatically revised its outlook for oil in 2018, saying that it underestimated how rapidly the market was tightening. As a result, Brent prices could hit $82.50 per barrel by the summer.
There are a few reasons why the investment bank is suddenly much more bullish on crude. First and foremost, oil inventories have declined much faster than everyone expected, pushed along by strong demand, high OPEC compliance, maintenance and steep declines in production from Venezuela. Goldman says that these factors are not going away anytime soon, and will continue to tighten the market.
In the fourth quarter of 2017, Goldman estimates that the oil market was in a sizable supply deficit, on the order of about 1.1 million barrels per day. That translated into inventory declines in the OECD by about 105 million barrels. Those declines put global inventories at about the five-year average.
That deserves some repeating: Goldman Sachs believes that the closely-watched metric — the five-year average inventory level — which OPEC is targeting, and which has received a lot of speculation around when it would be reached, has probably already been achieved.
One overlooked factor that lends additional weight to that assessment is that the oil market is bigger than it used to be. Demand is larger than it used to be, and so is storage capacity. So what constitutes “average” should also be at a higher level. Moreover, new production from U.S. shale requires a buildout of more pipelines, which permanently absorbs a certain quantity of oil that doesn’t really show up in the data. Goldman says this new infrastructure could account for as much as 40 million barrels of oil in the U.S alone