May 1, 2020 / 5:41 PM / a month ago

Goldman 'patiently bullish' on oil as fundamentals improve

(Reuters) - Goldman Sachs Commodities Research on Friday raised its second-quarter and full-year forecasts for global oil benchmark Brent crude futures, citing signs of improvement in fundamentals with quickly declining supplies and improving demand as lockdown measures are eased gradually.

FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant

The Wall Street bank raised its second-quarter 2020 Brent price forecast to $25 per barrel from $20 previously, while also slightly raising its full-year forecast for Brent to $35.8 per barrel from $35.2.

Its forecast would still leave oil prices down sharply on the year. Brent averaged $64.16 a barrel in 2019, so Goldman’s upwardly revised forecast of $35.80 for this year would still represent a decline of about 44%.

“It now appears likely that the market is passing its test on storage capacity, due to improving fundamentals, new creative forms of storage being put in place and a likely c.1 million barrels per day (mbpd) smaller May surplus than previously expected,” the bank said in a note.

Oil prices rose further above $26 a barrel on Friday as OPEC and its allies embarked on record output cuts to tackle a supply glut due to the coronavirus crisis that has been weighing on the market.

“We believe the recent rally can extend further in May, back to cash-cost levels ($25 per barrel for WTI), albeit with still-high price volatility,” it said.

Output cuts of 9.7 mbpd by the Organization of Petroleum Exporting Countries, Russia and other producers, known as OPEC+, began on Friday.

However, the bank added that the physical oil market is still in surplus and the inflection into a deficit is still weeks away.

“Beyond this relief rally, we caution that the oil bull market that we forecast will take time and require patience,” the bank added.

“Oil remains a physical asset and will therefore need to first price to clear the substantial inventory overhang through 2H20, leaving the commodity to lag the rally in related anticipatory financial assets like equities.”

The bank expects demand to continue to accelerate over the coming weeks as lockdown measures are finally eased, but lowered its 4Q20 and 2021 demand forecasts citing a disproportionate transportation hit and lasting impact on cruises and jet demand.

Reporting by Sumita Layek in Bengaluru; Editing by David Gregorio

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