“Perfect Storm” Drives Oil Prices Higher

March 19, 2019: “Perfect Storm” Drives Oil Prices Higher

Traders

Oil prices have already hit four-month highs, forcing a range of analysts to overhaul their expectations for this year.

“The latest Brent rally has brought prices to our peak forecast of $67.5/bbl, three months early,” Goldman Sachs wrote in a note. The investment bank said that “resilient demand growth” and supply outages could push prices up to $70 per barrel in the near future. It’s a perfect storm: “supply loses

are exceeding our expectations, demand growth is beating low consensus expectations with technicals supportive and net long positioning still depressed,” the bank said.

The outages in Venezuela could swamp the rebound in supply from Libya, Goldman noted. But the real surprise has been demand. At the end of 2018 and the start of this year, oil prices hit a bottom and concerns about global economic stability dominated the narrative. But, for now at least, demand has been solid. In January, demand grew by 1.55 million barrels per day (mb/d) year-on-year. “Gasoline in particular is surprising to the upside, helped by low prices, confirming our view that the weakness in cracks at the turn of the year was supply driven,” Goldman noted. “This comforts us in our above consensus 1.45 mb/d [year-on-year] demand growth forecast.”

Demand in China is growing at a stronger rate than expected, while other emerging markets are set to shake off a rough 2018 that saw a strong dollar, rising interest rates and high oil prices.

Meanwhile, other analysts are also similarly bullish. “As risky assets focused on macro concerns, oil markets have largely overlooked supply-side tightness in 1Q19 that has helped global oil markets to rebalance since the end of 2018,” JPMorgan Chase said in a report. “With a potential for a US-China trade talk resolution emerging, oil prices should finally break out of the narrow trading range and should be supported in the very near-term due to policy-driven supply-side tightness.”

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