Crude Flat on Conflicting Worries as Goldman Forecasts Range Bound 2020

Monday July 8, 2019

One of the surest signs amid a sea of uncertainty and worry among crude traders that the market will remain range bound for the time being was delivered on Monday, when Goldman Sachs said U.S. shale production growth is likely to outpace that of global demand at least through 2020.

The bank forecast U.S. oil output growth at 1.3 million barrels per day (bpd) and 1.2 million bpd in 2019 and 2020 respectively, which is in stark contrast to Goldman's global demand growth expectations of 0.8 million bpd and 1.6 million bpd respectively for the same periods.

What that means in terms of crude prices in 2020 is about $60 per barrel for Brent and $55.50 for West Texas Intermediate, according to Goldman, which also pointed out that the Organization of the Petroleum Exporting Countries' (OPEC) "willingness to continue to cede market share [is] likely to limit downside as well."

The forecast puts a much-needed perspective on crude trading, which is increasingly influenced by geopolitical events and a host of worries that, due to their sheer volume, seemingly combat one another for attention.

For example, prices on Monday firmed over tensions regarding Iran's nuclear program, but gains were mitigated by the ongoing perception - despite being discredited by some analysts - that global economic growth is stalling.

Brent fell 12 cents to settle at $64.11 per barrel. while WTI rose 15 cents to settle at $57.66 per barrel.

Iran on Monday threatened to restart deactivated centrifuges and increase uranium enrichment to 20 percent as retaliation to sanctions imposed by Washington on the Islamic republic; this prompted U.S. president Donald Trump to declare, "Be careful with the threats, Iran: they can come back to bite you like nobody has been bitten before!"

Purely from a price perspective, some experts viewed the brewing conflict as useful: Jim Ritterbusch, president of Ritterbusch and Associates, said in a note, "We see enough possibility of military conflict to cushion renewed price declines that might be driven by mounting expectations for a major slowing in the global economic growth path."

But as suggested by Goldman, it seems that no matter what develops on the geopolitical front, prices will largely remain locked: Gene McGillian, vice president of market research at Tradition Energy, said, 

"Worries about what is going on in the Persian Gulf continue to put a bit of a bid into the market, but without any new significant developments the market dropped back toward unchanged.

"Worries about demand growth are holding the market back."

The persistent notion that traders are overreacting to events was reinforced on Monday by Michael Tran, managing director for energy strategy at RBC Capital Markets; he stated, "Iran news is certainly dominating sentiment in the market, but I also think the post-OPEC selloff was a bit unwarranted....[investors] woke up today to more geopolitical risk and a market that was likely oversold."