Goldman Sachs: Oil Price Plunge Is Not Justified By Fundamentals

The recent oil price decline is not justified by fundamentals, Goldman Sachs says, keeping its estimate of Brent averaging $85 per barrel in Q4.

The move lower in oil prices so far this month has been excessive amid overblown worries about a strategic petroleum reserve (SPR) release and a hit to demand from the COVID resurgence in Europe and the United States, the U.S. investment bank said in a note to clients carried by Argus.

Since the end of October, Brent Crude prices have dropped by $8 per barrel to below $80 late last week. Concerns about the global economy with the return of lockdowns in Europe and expectations of a coordinated release of reserves from the United States and major Asian oil consumers have dragged the price of oil down over the past two weeks.

Goldman Sachs, however, believes that these concerns are excessive.

“Our pricing model shows that the $8/bl price decline since late October is equivalent to the market pricing in a 4mn b/d combined hit to demand or increase in supply over the next three months,” Goldman Sachs’s analysts wrote in the note cited by Argus.

“This would be … equivalent to a 100mn bl government stock release as well as a 1.75mn b/d hit to demand due to the current Covid resurgence,” the investment bank noted.

Goldman continues to keep its $85 forecast for average Brent prices this quarter, seeing the downward move as “excessive”, especially in light of the fact that the oil market is still in a deficit.

Last week, the investment bank said that the market had already priced in a concerted release of crude oil from national reserves, adding that the U.S. was expected to release between 20 and 30 million barrels, with the rest of the group likely releasing a combined 30 million barrels.

After a 3% plunge on Friday, oil prices were slightly up on Monday morning, with Brent trading at just over $79 a barrel and WTI Crude at $76.15.