Global investment bank Goldman Sachs on Friday said it anticipates that there won't be significant further increases in crude oil prices from the current levels. This viewpoint comes amid ongoing fluctuations in global energy markets.

Share Market Live

NSE

In an exclusive interview with CNBC-TV18, Daan Struyven, managing director and head of oil research at Goldman Sachs, shared his insights into the current state of the oil market, offering a perspective that might calm the nerves of those concerned about rising crude prices.

Struyven began the interview by addressing the future of crude oil prices. With oil markets known for their volatility, many have been speculating whether prices will continue their relentless climb. However, Struyven emphasized that one should not expect much more increase in crude prices from here.

Below is the verbatim transcript of the interview

Q: I want to ask you a lot of questions about the US economy and what is expected from Jerome Powell. But before that, you are sticking with your forecast of $86 per barrel for crude up until December this year. Why do you say that considering that growth data is coming in so weak?

A: It's absolutely correct that oil prices have edged down somewhat over the last few days on the back of renewed growth concerns coming out of Europe and China. That said in the prior seven weeks, crude oil prices, Brent prices rallied by about 15 percent and at this point, we're quite a bit closer to our year-end target for Brent at $86 per barrel. Two reasons why Brent has rallied for most of the summer. Number one, we think that the global oil market has finally returned to deficits after a year of surpluses. We returned to deficits both because global oil demand we think reached an all-time high in August of above 103 million barrels per day and because Saudi Arabia cut production in July. The second reason for the rally is that macro sentiment among oil investors, which was excessively pessimistic for much of the year, has normalized and has recovered along with repositioning. From here, we expect only modest gains, because we believe that oil markets will remain in sizeable deficits for almost 2 million barrels per day on average in the second half because of robust demand growth, anemic US supply growth, and strong supply discipline from OPEC Plus.

Q: I'm going to come back to oil market fundamentals of demand and supply for 2024 as well. But before that, the big event that's staring at us in the face, the Jackson Hole speech from the Federal Reserve Chairman Jerome Powell, what is the base expectation? And what can move the needle for the crude market?

A: So our Goldman economists don't expect any major change in messaging from Chair Powell, in part because we still have important data releases ahead of us, including jobs numbers and inflation numbers. I think big picture, the message will likely be that the US Fed is going to stay focused on bringing inflation down. But at the same time, this urgency to hike we think has dropped significantly, both because the level of the funds rate is now quite high and because we have made very substantial progress in terms of core disinflation.

Q: There is of course success in core disinflation. But what's the Goldman's view on growth? Aren't recent US economic data still pointing to a fair degree of resilience? What's your own estimate? Does a soft landing look still very likely?

A: So the Goldman house view has been for a while that the US economy is on track for a soft landing. And the confidence in this constructive part of the consensus view has really grown significantly over the last few months. We now believe that the probability that the US economy enters a recession in the next 12 months is just 20 percent, well below consensus. Three reasons for constructive growth views where GDP growth is just above 2 percent this year, just below 2 percent next year in the US, because of solid momentum, and because the fundamentals look good. The real incomes are still rising, and the drag from monetary tightening on growth is actually fading. And so if you combine that with all the progress on core disinflation, which eliminates the need for the Fed to hike further in our base case, putting that together, I think it's a pretty solid case for the soft landing for the US economy.

Q: So that is also a pretty solid case for yields remaining high. So, let me come to that, though, you will be looking at crude prices, you have to believe crude prices are willy-nilly influenced by the US yield level as well as by the strength of the dollar. Now, what has surprised financial markets or so it seems, is the very sharp rise in US yields in the month of August, 3.5 percent in the tenure in June 3.7 in July, and 4.3. In August itself, what is your sense? Do you think that even if core inflation data came in lower yields could remain higher because of - what Fitch pointed out - continued high fiscal deficit?

A: So our rate strategists had been looking for a while for the US 10-year yields to rise to around 4 percent. Both because we viewed the pricing of cuts in 2023 as strongly related to the consensus view of high recessionaries as excessive and that pricing in 2023 has significantly reduced. Second, we have been skeptical for a long time now about this idea that the neutral rate, the long-run equilibrium interest rate is as low as markets believed it to be in the last cycle. And as you point out, on top of that larger fiscal deficits in the US but also in most other major economies, should put some upward pressure on term premia and on long rates. That said, we believe that the rising rates have now run their course, both because we believe that investors may be overestimating the impact of increased pressure issuance. And because we think that the BOJ will stick, will not exit yield curve control for the remainder of this year.

Q: So your rate strategist is estimating 4 but maybe 4.3 will not hold for too long. Are they also expecting a strong dollar to continue? I mean, we've seen the dollar go north of 103, from sub 99, the dollar index that is, does the dollar remain strong? Because that will have an impact on crude prices?

A: Yes, absolutely. A strong dollar reduces demand for oil and commodities more broadly, outside of the US because most commodities, including oil are denominated in dollars. The dollar view of government research is nuanced. Big picture, we're looking for shallow dollar depreciation - shallow because the US economic outlook is still solid. And, we expect the Fed to keep rates at current levels until probably the second quarter of next year. I think the main reason the dollar has appreciated over the last few weeks is renewed growth concerns coming both from China and Europe.

Q: Now let me come back to your crude forecast for next year. Considering that the US economy also is going to slow down and China is not really living up to the promise of even normalising growth shouldn't the crude trend lower in 2024? I think your forecast for 12 months forward is even over $90 per barrel.

A: So we look for crude prices 12 months ahead at $93 per barrel for Brent. The main reason that we expect oil prices to edge somewhat higher, really is that we expect the oil market which is now in a very large deficit to stay in a sizable deficit next year at around 600 kbd on average for next year. Why do we look for somewhat tight oil markets for the next 18 months? Number one, we look for solid oil demand growth. In fact, we expect global gross domestic product (GDP) growth in 2024 to equal what it is this year, around 2.5 percent so we are not really looking for a slowdown.

On the supply side, we think that US production will grow at only a very anemic rate because of strong capital discipline in the sector. Last but not least, we think that OPEC's pricing power is greater than it has ever been and so Saudi Arabia and its partners we think will only very gradually bring barrels back to the markets and will only do that if prices move in line with our expectations and of course also if prices were to exceed our constructive forecast for oil prices.

Q: That's not exactly good news for a country like India, which is a net crude importer. But be that as it may just shorter term questions. You said your crude forecast for December is $86 per barrel. But what is the range? In the meanwhile, can we see the current downturn, take it even below $80? What's a likely range for the rest of this year?

A: So we think that the likely range for oil prices this year is sort of $75 per barrel to $95 per barrel. We think that volatility in oil prices, which has come down sharply year to date, will remain fairly muted on the demand side, because we think that, recession risk is lower than what we believe and on the supply side, because we think that OPEC Plus and Saudi Arabia will really manage the speed at which they bring back barrels to the market as a function of fundamentals and as a function of prices.

Q: Any specific words we have to watch out for from Jerome Powell?

A: I think a big question is whether we get any signaling on the bar to keep hiking, in terms of inflation numbers, or perhaps any real upside risk from a reacceleration in growth above trend.

For more details, watch the accompanying video