Goldman Sachs says November oil price fall 'excessive'

US bank Goldman Sachs is sticking to its forecast that Brent will average $85/bl this quarter, arguing that this month's decline in oil prices has been driven by an "excessive wall of worries" and has "overshot" the actual fundamental risks.

Front-month Ice Brent crude futures slipped below $79/bl at the end of last week, having approached $87/bl during intraday trading on 25 October. A new wave of Covid-19 cases sweeping Europe has prompted fresh lockdown restrictions in several countries. This — combined with reports of a potential Strategic Petroleum Reserve (SPR) release in the US and elsewhere, and concerns over China's economic growth and its property market — has weighed on prices, according to Goldman Sachs. But in its view, the fall has "far overshot the actual fundamental risks due to low trading volume", the bank said in a note to investors.

"Our pricing model shows that the $8/bl price decline since late October is equivalent to the market pricing in a 4mn b/d combined hit to demand or increase in supply over the next three months," the bank said. "This would be ... equivalent to a 100mn bl government stock release as well as a 1.75mn b/d hit to demand due to the current Covid resurgence."

Goldman Sachs points out that this would be a much bigger SPR release than is reportedly under consideration and a larger Covid impact on demand than last winter when vaccination rates were significantly lower than they are now. The bank also said that while its tracking of Chinese oil demand shows a drop in demand in recent weeks, it remains up year on year.

"Net, low liquidity has left the oil market pricing a record large SPR stock release, aggressive lockdowns in Europe and a sharp slowdown in Chinese growth," Goldman Sachs said. "We therefore view the move as excessive, especially as the oil market remains in a large deficit, and reiterate our $85/bl 4Q21 average forecast."

The bank said inventory data point to an imbalance in supply and demand of around 2mn b/d over the last four weeks. "This magnitude of deficit is in fact on its own sufficient to absorb the current perceived headwinds to the oil bull thesis, with lower prices in fact reducing the odds of a strategic release," it said.

By James Keates