Goldman Sachs Sees Crude Heading to $80/bbl, but US Oil Could Suffer Under China

Crude prices edged up on Monday. File Image / Pixabay

Even though concern over geopolitical tensions and the possibility of more crude flooding the market continues to dominate headlines, oil prices on Monday still managed to increase, with West Texas Intermediate rising 79 cents to settle at $65.85, and Brent jumping a robust $1.90 to $75.34 per barrel.

However, Bob Yawger, director of energy futures at Mizuho, warned that "Volatility is going to be pretty high this week," since on Friday the Organization of the Petroleum Exporting Countries (OPEC) will stage its highly anticipated meeting in Vienna, in which is it widely expected to relax its output restrictions to compensate for lost production from Venezuela and export restrictions from Iran.

In the meantime, considerable trading fallout could occur as a result of China last week announcing a 25 percent duty on U.S. crude in retaliation for U.S. president Donald Trump's decision to hit $50 billion in Chinese goods with an equivalent tariff.

Suresh Sivanandam, senior manager for Asia refining at Wood Mackenzie, pointed out that with WTI trading at about $66 per barrel, the tariffs would tack up to $17 onto the cost: "A 25-percent tariff is a huge number; the discount has to be nearly double for it to make sense for China" to import U.S. crude, factoring in shipping costs."

A Wood Mackenzie brief on Monday stated, "While China could secure the crude from alternative sources such as West Africa, which has similar quality as the U.S. crude, U.S. would find it hard to find an alternative market that is as big as China."

For the record, Chinese companies spent nearly $2 billion to import American crude oil in the first quarter of the year.

CNBC observed that U.S. drillers face two likely outcomes, "neither of which are good: U.S. prices would have to fall even lower relative to foreign crude to make it attractive to Chinese buyers, or American oil would have to sell at a discount in other markets."

Still, calamity seems to be the constant companion to the crude market, and as if seeing past the murk Goldman Sachs on Monday said it still expects oil to shoot back above $80 despite what might happen at the OPEC meeting and despite escalating trade wars and other issues.

The bank stated, "Our updated global supply-demand balance continues to point to further declines in inventories and higher oil prices in the second half of 2018," and it reaffirmed its previous Brent forecast of $82.50.

It added, "We continue, however, to view the risks to this forecast as skewed to the upside, even if concerns over demand and higher OPEC production weigh on prices near term."

Goldman analysts think OPEC and Russia production will increase by 1 million barrels per day (bpd) by the end of 2018, and by another 500,000 bpd in the first six months of 2019 - a volume many analysts worry will send prices plummeting downward but that the bank thinks will merely offset existing supply disruptions.

If nothing else, Goldman is a reliable source of level-headed reason in an analytical sector prone to dramatics: in May, the bank downplayed the fears surrounding the U.S.'s restatement of sanctions against Iran, stating that "the bullish environment for commodities and our bullish view is predicated on demand and where we are in the business cycle, and not on geopolitical risk; in fact, there's very little evidence that there's a geopolitical premium on oil prices right now."