AlwaysFree: Goldman Sachs: Global Oil Reserves Release “A Drop in The Ocean”

On Wednesday, Goldman Sachs analysts commented that the move led by the US to release government oil reserves by several major oil consumers is a drop in the ocean as the impact would likely be smaller than earlier expected to cool the prices.

The release may add about 70 million to 80 million barrels of crude supply, smaller than the more-than-100 million barrels the market has been pricing in, Goldman Sachs noted.

"On our pricing model, such a release would be worth less than USD2/barrel, significantly less than the USD8/barrel sell-off that occurred since late October," the bank said.

It added that the swap nature of most of these barrels implies an even smaller, about 40 million barrels net, increase in oil supplies over 2022-23, which translates to a market drawing up to 2 million bpd at present. 

For the US, however, the releases would warrant a USD2/barrel downgrade to Goldman's year-end Brent price forecast.

By 01.22 GMT on Wednesday, Brent crude futures slipped by 0.4% or 32 cents to USD81.99/barrel after climbing by 3.3% on Tuesday. US WTI crude futures dipped by 0.2% or 12 cents to USD78.38/barrel, reversing out of a 2.3% gain in the previous day.

Goldman noted that due to the impact of the resurfacing cases of coronavirus in Europe and China, Brent crude prices have also priced in an additional hit to global oil demand of 1.5 million bpd for the upcoming three months.

"We view these as likely excessive concerns over the next three months, leaving the recent sell-off overshooting fundamentals due to the year-end decline in trading activity," the bank added.

The bank also added that the lack of progress on negotiations with Iran on a nuclear deal would likely offset risks.

Additionally, Goldman Sachs advised the Organization of the Petroleum Exporting Countries (OPEC) to consider halting its production hikes to offset the detrimental SPR impact of lower oil prices on the needed recovery in global oil capital expenditure (CAPEX). In the face of the coronavirus demand risks, such a move would be justified as prudent.

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