WTI crude fell through significant support on Thursday, having traded firmly range-bound since the beginning of August.
The weak technicals and bearish fundamentals, however, are not going to dampen Goldman Sachs’s bullish outlook. On Friday, the investment bank/bank holding company/hedge fund put out the following missive, emphasising their belief the bulls will return, although probably not until October:
A clear fundamental trend unlikely to arise until October
This lack of a clear trend in fundamentals has created a significant amount of impatience for signs of improving oil fundamentals — particularly after this week’s poor demand statistics — prompting the phrase, an “energy-less recovery”. This misses the fact that demand still remains inline with the macroeconomic variables, which have only just begun to recover and are barely off the trough. Exacerbating the lack of direction off the trough are the seasonally weak shoulder months in demand, which further increase the price volatility. While we continue to believe in a sequential recovery in 4Q2009 demand, that drives our $85/bbl end of year target, due to the shoulder months we are unlikely to see evidence of it until October.
As for demand, Goldman sees enough of a recovery in place to raise US demand forecasts significantly for the rest of the year. As they explained:
The surpise in demand, however, has been to the upside
Even distillate demand — the weakest sector — is inline with the rise in industrial production off the lows. Where demand has been out of line, the surprise has been to the upside. Even this past week, the “terrible” demand number which declined seasonally to 18.5 million b/d was above our 3Q2009 forecast, while China has moved beyond recovery with demand above pre-recession highs. Accordingly, we are raising our demand forecasts. Importantly, the permanent damage from the credit crisis is much less than we had previously thought, which means that we are beginning the recovery from a higher base, suggesting a 4Q2009 demand level that we originally thought would take until 3Q2010.
But upside surprises in supply leave price forecasts unchanged
While we are revising up our demand forecasts, we maintain our price forecasts as the higher demand has been met by stronger supply — particularly out of the FSU. Accordingly, we are maintaining our WTI end of year price target of $85/bbl, an average 2010 WTI price forecast of $90/bbl and an end of 2010 WTI price target of $95/bbl.
And here’s that demand amendment graphically:
All of which leads Goldman Sachs to conclude that “all the market needs now is just a little patience”.
As for that small problem of all that distillate overhang in the market, they say:
Weak distillate demand is consistent with current economic activity
…we expect US industrial production to continue increasing off its lows and for US distillate demand to continue increasing with it as the overall US economic recovery gets on track.
Related links:
Traders pay up for downside protection in oil – FT Alphaville
‘Demand is in the toilet’ – FT Alphaville