Goldman Sachs increased its outlook for Brent crude oil prices in 2018 with prices expected to top $80 per barrel by the middle of the year. However, analysts with UBS are taking a more bearish stance amid "negative signs" from U.S. shale.
"The rebalancing of the oil market has likely been achieved, six months sooner than we had expected," Goldman Sachs analyst Damian Courvalin wrote in a Feb. 1 note to clients.
The bank raised its Brent oil price forecasts from $62 per barrel to $75/bbl, $82.50/bbl and $75/bbl for its three-, six- and 12-month forecasts, respectively.
"This forecast upgrade reflects a steeper level of backwardation — given a lower inventory path — as well as an expected increase in marginal costs — given higher activity levels and non-engineering cost inflation due to a weaker dollar and higher oil input prices," Courvalin wrote.
The March Brent futures contract expired Jan. 31 at $69.05/bbl. The April contract closed Feb. 1 at $69.65/bbl.
Goldman Sachs said "stellar demand growth" in 2017 should continue in 2018 while an increase in OPEC production will lag the normalization in inventories, "requiring a shale supply response."
"We expect that the shale response, OPEC's eventual ramp-up and higher non-OPEC production will all bring prices lower sequentially with our 2020 Brent forecast at $60," Courvalin wrote.
Analysts with UBS also see ample shale supply capping oil prices, as any attempt to top $72/bbl could trigger selling and bring prices back down to $61/bbl.
"Deteriorating inventory dynamics as 1Q surpluses emerge and a rise in US crude production have the potential to unsettle the record-high net length in crude futures," the UBS analysts, led by Giovanni Staunovo, said in a Jan. 31 research report.
"We believe the first 'negative signs' are emerging from U.S. shale producers, due to their relatively short lead times, about the potential overshooting of oil prices," the analysts said, pointing to a recent jump in the number of horizontal oil rigs in the Permian basin, where most of the U.S. crude supply growth is expected.
UBS highlights that strong U.S. crude supply growth and/or deteriorating inventory dynamics could "trigger a sentiment shift and unsettle the record speculative length in the oil market." The firm also noted stagnating oil demand in China in December 2017.
"While one month doesn't make a trend, we will closely monitor incoming data to see if high oil prices are hurting demand growth," UBS said.
