January 16, 2018 / 8:30 AM / 8 months ago

Goldman Sachs sees likelihood crude prices will exceed forecasts

(Reuters) - Goldman Sachs said on Tuesday that crude oil prices are likely to exceed its forecasts for the coming months due to rising demand and strong compliance to a production cuts.

The investment bank sees Brent and West Texas Intermediate average price forecasts at $62 and $57.5 per barrel for 2018, respectively.

Brent crude prices consolidated recent gains at around $70 a barrel on Tuesday, a level not seen since 2014’s dramatic oil market slump. [O/R]

Oil has been pushed higher by an effort led by the Organization of the Petroleum Exporting Countries and Russia to withhold production since January last year. This, combined with healthy oil demand, has pushed up crude by almost 15 percent since early December.

“This rally has been driven first by robust fundamentals, with strong demand growth and high OPEC compliance accelerating,” the U.S. bank said in a note.

At the current oil price level, the forward curve is well above marginal costs across regions which could lead to a gradual increase in producer hedging and drilling activity, Goldman said.

The bank, however, expects deferred prices to decline from current levels as producer activity and 2019 hedging ramp up, it sees this having limited impact on spot prices as lower inventories would increase the level of backwardation.

“While their hedge coverage is relatively high for 2018, that is not the case for 2019 and we expect oil producers to start extending their hedge tenors,” the bank added.

Reporting by Eileen Soreng in Bengaluru

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