Goldman's an oil bull in 2018 with 9% total returns forecast

By Serene Cheong and Dan Murtaugh on 12/5/2017

SINGAPORE (Bloomberg) -- Goldman Sachs Group predicts oil prices will retain their strength, at least through 2018.

The bank raised its forecast for U.S. WTI as well as global benchmark Brent crude, saying OPEC and its allies showed a stronger commitment than expected to extending their output curbs at the producer group’s meeting last week. It expects positive total returns of 9% from crude over the next 12 months, according to a Dec. 4 report.

The bank’s bullishness is in contrast to Citigroup, which signaled it’s bearish on prices as it predicts OPEC, Canada, Brazil, Russia and the U.S. will look to add supplies. While Goldman believes that OPEC and its partners will fully comply with their output deal, it cautioned that shale and other producers will start to respond to stronger crude by 2019.

“We continue to find OPEC’s assessment of the supply response to higher prices as too conservative, especially for shale,” analysts including Damien Courvalin wrote in the report. “We believe evidence of this response, with higher shale drilling activity and production in coming months, will play an important role in avoiding a policy overshoot from OPEC.”

OPEC and its partner nations, seeking to shrink bloated global inventories, agreed last week to extend production curbs that began in 2017 through to the end of next year. Goldman now anticipates full compliance to the agreement to last longer, and for the exit from the pact to be less dramatic. Goldman cut its forecast for OPEC and Russian oil output next year by 350,000 bpd to 44.3 million.

Oil Demand

The bank’s optimistic on global oil demand growth and expects the output cuts to end early, with a ramp up in the third quarter of 2018. “At that point, however, we expect inventories to be close to their 5-year average level with an exit that keeps inventories near such level,” it said.

WTI, the U.S. marker, traded at $57.25/bbl in London, while Brent, the benchmark for more than half the world’s crude, was at $62.25/bbl.

The bank now expects a wider gap between Europe’s Brent and WTI, which is deliverable to Cushing, Oklahoma, because of surging production from the Permian Basin in west Texas.

Some output from the play has to go through Cushing in order to get to coastal markets, and TransCanada Corp. responded to the demand by raising spot rates on its Marketlink pipeline next year. That’ll boost freight costs and widen the WTI-Brent differential to $4.50/bbl, up from a previous estimate of $3, according to Goldman.

The bank also expects steeper backwardation -- a market structure where near-term futures are higher versus those for later delivery -- than what’s currently priced in.

“Greater backwardation will, in turn, provide long investors with positive returns despite a spot forecast near current levels and we forecast +9% crude total returns over the next 12 months,” Goldman said in the report.

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