Goldman Sachs, the “standard bearer of crude oil,” predicts that average global oil demand will hit record levels in the next two years amid rising demand for aviation, transportation and infrastructure construction.
On December 17, according to Bloomberg, Damien Courvalin, head of energy research at Goldman Sachs, said: Just before the emergence of Omicron, demand had reached a record high level; at the same time, aircraft demand is increasing and the global economy is still increase. You see, oil demand will continue to hit record highs in 2022 and 2023.
This would allow oil prices to reach $100 if supply growth is too slow to keep up with demand.
Courvalin said that while the investment bank’s base case forecast is that Brent crude oil prices will remain around $85 a barrel next year and into 2023, the cost of drilling will rise, or unexpected supply shortages force prices to surge high enough to destroy demand. Oil prices could break triple digits.
As of now, Brent crude oil is at US$73.99/barrel, which has fallen from a high of US$85/barrel in October, with an intraday decline of 1.37%.
But since this year, oil prices have still risen by more than 40%.
Goldman Sachs has always been bullish on oil. Even when OPEC+ announced an increase in production earlier this month, it firmly believed that oil prices still have upside potential and will not undermine the ongoing structural bull market. Its forecast for Brent crude to average $85 a barrel in 2023 has “very clear upside risks.”
“Oil prices must go higher”
“There is a clear lack of supply in the face of strong demand. Oil prices have to go higher to offset the higher capital costs of funding projects,” Courvalin said in an interview on Friday.
From the supply side, he believes that in the long term, rising upstream costs and financing costs are impacting output growth as investors choose to support ESG-focused industries.
At the same time, investment in long-cycle oil projects also declined due to uncertainty about the energy transition and its impact on fuel use.
From the demand side, Courvalin believes that the current demand for gasoline, diesel and plastics has reached record levels, and consumption is expected to reach record highs in 2022 and 2023; before 2030, global oil demand will stabilize to about 106 million barrels per day, as the energy transition will be a gradual process.
Courvalin said electric cars will undercut gasoline demand, but big trucks and planes are still a long way from being decarbonized: For a market with oil demand of nearly 100 million barrels a day, annual electric car sales are now nearly 6 million is still a small fraction and does not reach the level of demand destruction of 100,000 barrels per day.
For power fuels, mild temperatures this winter and rising coal output in major producers and consumers have limited LNG price increases in Asia, Courvalin said.
Courvalin believes government capital spending is also supporting demand, both to support the post-pandemic economic recovery and to fund the energy transition needed to combat climate change. Growing concern about income inequality will also support commodities, as the poor tend to spend more of their income on goods and energy.
He noted that if supply cannot keep up and the market cannot balance until it reaches demand destruction, oil prices could rise to $110 a barrel.
Omicron has limited economic impact
When it comes to the new strain Omicron, Courvalin believes that the recent sell-off in commodities has been overdone due to unnecessary concerns about Omicron-related restrictions.
Courvalin believes investors will buy the dip once asset managers redeploy capital next year.
Courvalin said that although COVID-19 infections increased in parts of the northern hemisphere during the winter and economic recovery encountered obstacles, the extent of the lockdown remained limited, and “high-frequency mobile data also showed that its impact was limited.”
The recent $10 drop in oil prices, equivalent to a reduction in demand of 5 million barrels per day over three months, may be an overreaction. Because so far, governments appear to be responding to Omicron with greater and more frequent testing for the virus rather than renewed lockdowns.
Courvalin noted that some pent-up travel demand may revive as borders reopen.
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