By Senad Karaahmetovic
Goldman Sachs analysts slashed the oil prices forecasts to reflect “significant covid cases in China,” as well as a lack of visibility when it comes to the implementation of the G7’s price cap.
They cut Brent’s oil forecast for the fourth quarter to $100/bbl from the prior projection of $110/bbl. The analysts see the potential for new lockdowns in China due to new Covid-19 cases.
“While confidence remains high in a 2Q23 China reopening and the structural bullish underinvestment thesis, the path between now and next spring remains highly uncertain. China’s Covid cases are at Apr-22 highs, yet, the new policy reaction function is unknown. However, the logic of exponential virus spread, means further lockdowns will likely be required, if full reopening is not feasible,” the analysts said in a client note.
The new oil prices forecast is based on the lowered expectations for China demand, by 1.2 mb/d in the fourth quarter of this year. This equals the effective cut recently imposed by OPEC+.
Moreover, the analysts also note that Russia is draining inventories before the start of European Union curbs next month.
“We expect a lagged impact of the embargo on production, raising our expectations by c.0.3 mb/d over 4Q22… The net impact is a c.1.5 mb/d loosening of 4Q22 balances.”
This is lower than the market’s current prediction of a c.2 mb/d softening, which they say has exacerbated the move lower in oil prices.
All-in-all, the analysts expect that the oil market focus will remain on fundamentals, e.g. Russia’s export flows and the China pandemic.
“For longer-term investors, the current sell-off provides an opportunity to add length on yet another speed bump that will come to pass. From a tactical perspective, uncertainties abound, while discretionary positioning is still long and CTAs flows will be selling, leaving risks skewed lower in the near-term,” the analysts concluded.
As of 07:07 EST (12:07 GMT), oil is trading at $86.82, down about 0.7% on the day.
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