London — The chance of crude oil prices hitting $100/barrel is not "very likely," according to Goldman Sachs' head of commodities research Jeff Currie, noting a bearish price trend in the second half of next year and beyond.
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Iran faces sanctions on its oil exports from early November with the market looking for clues as to whether waivers will be granted to key oil consumers such as India and the methods Iran will employ to navigate around the restrictions, including turning off ship transponders.
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"Our base case is for a modest decline in inventories in the fourth quarter, which will likely keep prices somewhere around $80/b," Currie said, warning that it's the speed at which Iranian supply is lost that is critical as it could give the market and other producers, namely those in OPEC, less time to respond.
Brent crude futures, trading around $81.40/b midday Wednesday, have risen almost 30% since the start of the year, with major oil trading houses highlighting the possibility of $100/b oil back at Platts Asia Pacific Petroleum Conference, or APPEC, in September.
Question marks have surrounded the ability of OPEC kingpin Saudi Arabia to deliver the necessary barrels even though it has claimed it has a spare capacity of 12 million b/d compared with current production of 10.6 million b/d in September according to the latest S&P Global Platts survey. Other Gulf nations such as the United Arab Emirates and Kuwait have also said they could pump extra barrels if needed along with Saudi Arabian ally Russia, but nothing on the scale of Saudi Arabia.
"In the last four months we have seen a 20% rise in drilling in Saudi Arabia, you have already lost 700,000 b/d of Iranian exports and inventories built, which tells you there is already a lot more oil in the market," Currie explained.
He noted that "readily available" capacity is around 800,000 b/d and that is likely to rise to around 1.5 million b/d in the first quarter of next year, stating that after that period he doesn't see a supply issue. Goldman Sachs sees US crude in the second half of 2019 easing those supply concerns as the pipeline debottlenecking starts to occur.
His view is that it would take events greater than Iran to cause such a significant price spike, highlighting the issues around Venezuela as one potential supply risk. Crisis-torn Venezuela has seen production drop from above 2 million b/d over the past couple of years to 1.22 million b/d in September, according to latest Platts estimates.
The US Permian basin is set to be the biggest contributor to supply growth in the coming years once the pipeline capacity constraints ease significantly. Goldman Sachs believes that will happen in the second half of next year.
This rapid growth in shale production will "push us into the new oil order or lower-for-longer environment," Currie adds, with Goldman Sachs predicting a Brent crude price of $70/b at the end of 2019 and $60/b longer term.
However, he highlighted the risk beyond 2020 that a lack of long-cycle investment could come back to bite the oil market. "I'm confident we'll say in 2020, even in 2021, short-cycle production is likely to be sufficient to meet demand," Currie said. "I remember the 1990s we were told a very similar story. We call it the revenge of the old economy because of a lack of investment and long-cycle production. It didn't play out until 2004. So I still believe in that the story has credibility and will create higher prices. The question is we don't see it happening any time in the very near future," he added.
-- Paul Hickin, paul.hickin@spglobal.com
-- Edited by Maurice Geller, newsdesk@spglobal.com