Goldman Sachs Says Oil Demand Will Rebound But Supply Will Suffer
- Goldman Sachs says oil demand will rebound with a ‘V-shaped recovery’ but supply will follow an ‘L-shaped recovery, meaning it may not fully recover’ .
- Goldman Sachs thinks jet fuel demand is unlikely to recover from its current lows.
- Jeff Currie, head of global commodities research at Goldman, said: “You’re going to lose a lot of the jet demand that would have been associated with business travel.”
- Goldman Sachs predicts that 2-3 million barrels per day of air travel demand will be lost and a full recovery in demand will not occur until the third quarter of 2022.
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Goldman Sachs predicts a V-shaped rebound in oil demand, but expects fuel to suffer a setback due to a loss in business travel.
In a virtual press conference attended by Business Insider on Friday, the bank’s head of global commodities research, Jeff Curie, said: “We believe oil will post a V-shaped recovery, but supply will show an L-shaped recovery.”
“You’re going to lose a lot of the demand for aircraft that would have been associated with business travel.”
“Our base case is that you lose about 2 million barrels a day, you don’t have normalized demand until you get to the third quarter of 2022 at pre-crisis levels,” he said. he declares.
The coronavirus has brought air travel to a halt and proved to be a tumultuous time for the aviation industry, effectively wiping out any demand for new planes, and therefore, the parts needed to manufacture them.
Well-known billionaire investor Warren Buffett recently revealed that his conglomerate Berkshire Hathaway sold its shares in the ‘big four’ airlines in April at a price well below the purchase price and called the investment a mistake.
Currie added that Goldman Sachs expects oil demand next year to reach 99 million barrels per day in 2021, while demand this year will be 94 million barrels per day.
Global oil demand is expected to fall by a record 9.3 million barrels per day year-on-year in 2020, according to the International Energy Agency’s latest oil market report.
Why oil supply will be L-shaped during the recovery
Currie said oil supply will see an L-shaped recovery for three main reasons.
- Shutting down oil wells causes damage and it can be difficult to bring them back online.
- A sharp decline in investment spending.
- Access to capital. A combination of low returns means people are unlikely to line up capital to work in this space, Currie said.
“Now investors don’t want to hear about oil anymore. They’ve been beaten, they’re done with this space, it’s going to take a long time for them to come back,” Currie said.
What the United States can learn from China’s recovery
Goldman’s Currie expects the United States to recover similarly to China.
“So far we’re looking at the rest of the world, it’s tracked China almost perfectly in its descent and so far looks pretty much like China in its recovery.
But Currie said floating storage units will need to be emptied before prices can recover to around $50 a barrel.
“Oil demand in China at its peak was down 25%, now it’s down about 5%.”
Oil prices have been on a rollercoaster ride over the past month due to lower demand for fuel during the ongoing pandemic and a lack of storage space to accommodate the surplus.
The price of US oil turned negative for the first time in history three weeks ago. Prices have since recovered but still remain volatile as it remains uncertain whether the first month contract will also turn negative.
The price of oil continued to fall even after OPEC and its allies agreed to the largest production cut ever, intended to support prices. Investors remain unconvinced that the cuts can offset rising demand for commodities as the novel coronavirus pandemic prevents society from operating normally.
The price of U.S. oil is trading about 2% lower at $29.30 a barrel as of 6:33 a.m. ET, while Brent, the international benchmark, is also trading 2% lower at $30.24.