The rebound in crude oil prices may be short-lived, as the oil market fundamentals appear to be turning bearish once again, with the likelihood of Brent crude slipping back to $35 per barrel in the short term, over uncertainty in demand recovery and returning production from the United States and Libya.
Despite the recent optimism that output cuts from OPEC+ and curtailments in North America will combine with demand recovery, Goldman Sachs warns that there are four key reasons why oil prices might drop in the coming weeks.
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In early May, Goldman Sachs had predicted that oil demand could rebound enough to exceed supply by the end of May. However, now the consumption forecasts appear ambitious and the demand recovery is expected to be slow and still highly uncertain in the short term, especially due to low returns from refining.
The other 3 key reasons for a predicted halt in oil rebound are the resumption of production by US shale and Libya, prices closing in on levels where Chinese opportunistic oil purchase would slow, and a still massive 1 billion barrel of crude outstanding in global oil inventories.
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Libya has confirmed its plans to export crude produced at two of its largest oilfields again, after production had been halted for almost 6 months as the North African country’s output, which was negatively impacted by conflicts, was getting back to revival.
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Also, some US shale producers are bringing back shut-in production this month. The US inventory could again be influential this week, with shale producers coming back.
Goldman Sachs said that with OPEC’s latest output cut already overpriced, the forecast is that there will be reduction in prices in coming weeks with the short term forecast for Brent crude at $35 per barrel as against the spot prices of $43 per barrel. Despite the oil price surge in May, the poor refining margins and the recent sharp decline in US crude bases have given rise to bearish outlook.
Morgan Stanley warned that oil prices might have risen too fast too soon, as the market was focused on supply cuts in order to deal with the oil glut. They said that the global oil demand may not return to pre-COVID-19 levels before the end of 2021.
