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Oil prices have struggled to rally above $64 a barrel since last quarter's sharp pullback, but Goldman Sachs believes crude futures could break out in the coming months.
The investment bank forecasts international benchmark Brent crude will peak at $67.50 a barrel in the second quarter. Goldman's outlook is based on its view that forecasts for demand growth have grown too gloomy and OPEC has adopted a "shock and awe" approach to pulling back supply.
"Our constructive outlook for oil prices in 1H19 is predicated on both large supply cuts as well as resilient oil demand growth," Goldman analysts said in a research note released on Tuesday evening.
Goldman believes the world's appetite for oil will grow by 1.4 million barrels per day in 2019. That's in line with the International Energy Agency's outlook, but above the consensus on Wall Street and OPEC's view that demand will grow by just 1.24 million bpd.
The bank thinks forecasters are underestimating oil demand from emerging markets in particular.
Last year, developing countries drew down stockpiles of oil to weather a period when oil prices, the U.S. dollar and interest rates were rising — a triple threat that sent the cost of crude soaring in nations from Argentina to India. Goldman sees that trend of destocking reversing. The bank also thinks a recent, rapid decline in emerging market demand for power fuel will ease.
However, Goldman notes that recent economic data have fallen short of its expectations, so it could be another few months before the bank can determine whether its demand outlook hits the mark.
On the supply side, Goldman believes OPEC and its oil market allies have addressed flaws baked into their last deal to cut output, which ran between 2017 and mid-2018.
In Goldman's view, the new deal that kicked in last month delivers a big reduction at the outset — OPEC took nearly 800,000 bpd off the market in January — while making clear that the producers plan to ramp up output in the future, dissuading U.S. shale drillers from turning on the taps.
"Despite our expectation that OPEC's long-term incentive is to grow production strongly, we believed that such a 'shock and awe' cut would be preferable as it would quickly draw inventories while slowing the response of shale producers," Goldman said.
Goldman says supply losses are exceeding expectations this year, as the Trump administration enforces new energy sanctions on Venezuela's state-owned oil firm and U.S. producers offer tepid guidance on future output.
However, the bank is leaving its production expectations in place, noting that OPEC's output fell in January largely due to involuntary declines from Iran, Libya and Venezuela. It also thinks Iran and Libya's output levels could be bullish for oil prices in the near term.