According to Goldman Sachs analysts, a coordinated release of government oil reserves by a number of oil importing countries headed by the United States may add approximately 70 million to 80 million barrels of crude supply to the market, which is less than the more than 100 million barrels the market has been anticipating in total.
“On our pricing model, such a release would be worth less than $2/bbl, significantly less than the $8/bbl sell-off that occurred since late October,” the bank said in a note titled “A drop in the ocean”, dated Nov. 23.
On Tuesday, global oil prices rose to their highest in a week following the decision of the US and other oil consuming countries of releasing oil from their strategic petroleum reserves (SPR) in an effort to bring down the high crude prices in the market was well short of what the market was expecting,
By 0031 GMT on Wednesday, US West Texas Intermediate oil had dropped 35 cents to $78.15 per barrel.
“The aggregate size of the release of about 70-80 mb (million barrels) was smaller than the 100+ mb the market had been pricing in, with the swap nature of most of these barrels implying an even smaller, about 40 million barrels net, increase in oil supplies over 2022-23,” Goldman said.
“That is in the context of a market drawing up to 2mb/d at present.”
According to Goldman, the impact of Covid-19 in Europe and China has been priced into an additional 1.5 million barrels per day hit to global oil demand for the next three months.
An additional 1.5 million barrels per day hit global oil demand for the next three months because of the impact of Covid-19 in Europe and China has already been accommodated for by brent crude prices.
“We view these as likely excessive concerns over the next three months, leaving the recent sell-off overshooting fundamentals due to the year-end decline in trading activity,” the bank said.
While the bank’s year-end Brent price projection will be downgraded by $2 a barrel due to the coordinated government stock releases, it anticipates the lack of movement on Iran negotiations to mitigate risks.
On Monday, world powers and Iran will meet to restart discussions on a nuclear agreement that might relieve US sanctions on Iranian oil and allow Tehran to raise exports.
“In addition, OPEC could consider halting its production hikes to offset the detrimental SPR impact of lower oil prices on the needed recovery in global oil capex, likely justifying such action as prudent in the face of COVID demand risks,” the bank said.
(Adapted from BusinessTimes.com.sg)