Follow Us on Google
By Adewale Sanyaolu
Crude oil could soon swing into a deficit that will make next year a difficult one, Goldman Sachs said, as spare production capacity dwindles and underinvestment threatens future supply.
Speaking on the sidelines of an event in Saudi Arabia, Goldman’s top commodity analyst Jeffrey Currie said, as quoted by Bloomberg, that the industry is not spending enough to secure future production amid dwindling global spare capacity. This could tip the oil market into a serious supply problem next year, but the price for a barrel of Brent could top $100 before then.
According to Currie, rising demand from China and sanctions on Russian oil will contribute to the deficit, which he expects to manifest in the second quarter of this year. In response, producers will tap their spare capacity, leaving it lower than it was before. Eventually, this will lead to a serious imbalance between supply and demand.
“Right now, we’re still balanced to a surplus because China has still yet to fully rebound. Are we going to run out of spare production capacity? Potentially by 2024 you start to have a serious problem,” Currie told Bloomberg.
Saudi Arabia’s energy minister has echoed the concern about insufficient spending on future oil production. In fact, Abdulaziz bin Salman has been warning about that for more than a year, and he did so again this weekend.
“All of those so-called sanctions, embargoes, lack of investments, they will convolute into one thing and one thing only, a lack of energy supplies of all kinds when they are most needed,” he said.
Brent crude has been trading at between $75 and $80 a barrel for most of the year so far but Goldman, along with other investment banks, believes it has higher to go. According to Currie, the oil market will swing into a deficit by May.
Meanwhile, the Russian oil price cap mechanism is still meeting its objectives, a G7 price cap coalition official told Reuters at the weekend.
Any Russian production cuts that may be forthcoming will disproportionately hurt developing countries, the G7 official added.
Earlier on Friday, Russia announced a 500,000 bpd crude oil production cut—crude oil production, not crude oil and condensate production—with Russia’s Deputy Prime Minister Alexander Novak preceeding that with a warning that there was a risk of reduced crude oil production yet this year directly as a result of the EU import bans and the G7 price caps on its crude oil and crude oil products.
The G7 official cautioned, however, against the veracity of Russia’s reports of oil production cuts.
Up until this week, it had been widely reported that Russia’s crude oil production and exports were holding fast in the fact of the bans and price caps, with the Russian Ministry reporting 9.8-9.9 million bpd last month—a close match to November and December figures despite the new measures designed to punish Russia for its military operations in Ukraine.
The discount for Russian Urals crude oil has dropped to $30 per barrel below the international Brent crude oil benchmark, with Russia’s budget sinking into a deficit in January. An oil production cut on behalf of Russia could boost the Brent benchmark, inadvertently boosting Urals pricing too. The Kremlin said that it had talked with some OPEC+ members regarding its decision to cut oil production, but two OPEC+ delegates told Reuters that OPEC+ had no plans to cut production.
So far, Russia has been able to find willing buyers in the Asian market for its crude oil, largely in defiance of Western sanctions.
