Bulls or Bears? Oil Price Volatility May Be Only Certainty

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Goldman Sachs (NYSE:GS) (New York, New York) stayed in character this week by stressing its case for a higher-for-longer outlook for crude oil prices, though we'll see later this week if that's confirmed by major oil-thinking economists.

Ever the bull, Goldman in a weekend note said market balance will only come from "demand destruction on top of the ongoing economic slowdown."

Markets are grappling with an ever-diminishing source of spare capacity and still-somewhat-healthy global demand. With U.S. President Joe Biden drawing on the nation's Strategic Petroleum Reserves, spare supplies reserved usually for emergencies are running quite low. Meanwhile, European economies are working to end their reliance on Russian crude oil, making the current tight conditions even worse.

But markets have a way of acclimating to extraordinary events. Outages triggered by civil war in Libya more than a decade ago prompted the International Energy Agency (IEA) to call on its members to tap their strategic reserves to make up for the shortfall. Fast forward to today, and Libyan declarations of force majeure due to ongoing unrest barely make the headlines.

Elsewhere, a good 5 million barrels per day (BBL/d) of oil is stifled by Western-backed sanctions against the likes of Iran, Russia and Venezuela. But the price of oil is breaking away from record highs reached shortly after Russian military forces invaded Ukraine in late February. West Texas Intermediate, the U.S. benchmark for the price of oil, settled at pre-war levels last week, closing the trading session Friday at $89.01. It had topped $120 early this year.

Goldman did revise its forecast for the price of oil lower--putting Brent at $110 per barrel during the third quarter and $125 in the fourth quarter. That's down from previous estimates of $140 and $130, respectively. But it's still high by comparison to current levels.

Goldman does have a reputation for bullish positions, but Swiss investment bank UBS Group AG (NYSE:UBS) (Zurich) too sees a rebound. UBS also has Brent at $125 by year-end. Brent is currently trading at around $97.50 per barrel, holding a $6-per-barrel premium over WTI.

But neither Goldman nor UBS seem to match U.S. federal forecasters. The U.S. Energy Information Administration (EIA) said last month it expected Brent to average $104 per barrel this year and fall to $94 per barrel in 2023. That forecast was slightly lower than June estimates of $108 and $97, respectively.

The EIA on Tuesday said it didn't anticipate the market will change all that much--Brent should end the year at $105 and average $95 per barrel next year. We also get monthly market reports from the IEA and the Organization of the Petroleum Exporting Countries (OPEC). The former has a knack for offering something for everyone, though OPEC economists tend to shoot a bit straighter than the Western-backed IEA.

OPEC last month left both its economic growth and demand outlooks static. Its sister organization, dubbed OPEC+, offered only another 100,000 BBL/d come September, an offering that reflects the inability of most member states to put more barrels on the water. Only Saudi Arabia and the United Arab Emirates have any meaningful spare capacity left.

And we've yet to see the full impact of the pivot away from Russian crude oil, but if current trends are durable, global markets are in retreat and presumably taking demand with them. It took a couple weeks for it to sink in, but concerns that major economies from the United States to the United Kingdom are facing a recession are finally catching up with the price of oil.

"In the current volatile trading environment nothing can be taken for granted but it is worthwhile to note that neither the stock markets nor the dollar hint at a continuous rally (for crude oil prices), at least not for now," London oil broker PVM wrote in a Tuesday research note.

Predicting the price of crude oil is akin to alchemy. Most major reporting agencies in the past put several caveats--war, Iranian nuclear negotiations, economic traction--into their forecasts. But one thing is certain. Given the competing positions from the likes of Goldman and the EIA, markets should remain volatile for the foreseeable future, leaving bets on future prices something of a guessing game.

For related information, see August 10, 2022, article - Fitch Offers Conservative Price Outlook for Oil and Gas.

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