Oil Dips on China Covid Woes, But Goldman Still Bullish On Market Prospects

Meanwhile, Keystone cancellation won't harm oil imports from Canada, say experts: File Image/Pixabay

The one-two punch of China's rising Covid infections possibly impacting demand and an increase in U.S. crude inventories resulted on Friday in a price decline of two key oil benchmarks.

Brent dipped 60 cents, or 1.1 percent, to $55.50 per barrel, while West Texas Intermediate fell 86 cents, or 1.6 percent, to $52.27.

U.S. crude inventories  rose by 4.4 million barrels in the most recent week, compared to expectations for a 1.2 million barrel draw; Tony Headrick, energy market analyst at CHS Hedging, pointed out that "Crude oil exports did fall quite dramatically, which is the main reason for a decent build overall in crude stocks."

Still, Goldman Sachs on Friday struck an optimistic tone by pointing out that the new U.S. administration's plans for huge fiscal spending and little urgency to lift sanctions on Iran are constructive for oil and gas prices.

The bank stated in a note, "On our estimates, a $2 trillion stimulus over 2021-22 would... boost U.S. demand by about 200,000 barrels per day [bpd]."

Goldman believes that because the White House is looking to strengthen and lengthen nuclear constraints on Iran, the country's oil exports would remain moderate for the first half of this year and hover at 0.5 million bpd in Q2.

Bijan Zanganeh, oil minister for the Islamic republic, painted a slightly different picture of his country's energy market on Friday by stating that exports have climbed in recent months and sales of petroleum products to foreign buyers reached record highs despite U.S. sanctions: "We set the highest record of exports of refined products in the history of the oil industry during the embargo period."

However, he would not disclose any numbers.

Meanwhile, even though analysts earlier this week worried that the Joe Biden presidency heralded a bearish market for crude, his cancellation of the Keystone XL project hasn't prevented the U.S. from being poised to pull in record oil imports from Canada in coming years via other pipelines that are in the midst of expanding.

It is expected that the current export volume from Canada of 3.8 million bpd will rise to between 4.2 million and 4.4 million bpd over the next few years; pipeline expansions will add over 950,000 bpd of export capacity before 2025, according to Rystad Energy.

Mark Oberstoetter, research director at Wood Mackenzie, said of the expansion projects, "If you add them all up, you can make the argument KXL was not needed."

However, in the long term, the writing is still on the wall for oil demand overall: Haim Israel, head of global thematic research at Bank of America, told media on Friday that hydrogen is going to take 25 percent of all oil demand by 2050: "Yes, we'll still need it, yes, it's still going to be around, but the market share of oil is going to plummet."