Goldman Sachs cuts oil prices forecasts on China concerns

Goldman Sachs analyst Callum Bruce 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.

Bruce cut Brent's oil forecast for the fourth quarter to $100/bbl from the prior projection of $110/bbl. The analyst sees 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,” Bruce 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 analyst also notes 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 Bruce says has exacerbated the move lower in oil prices.

All-in-all, Bruce expects 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 analyst concluded.

As of 07:07 EST (12:07 GMT), Brent oil is trading at $86.82, down about 0.7% on the day.

By Senad Karaahmetovic

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