2024 Oil Price Outlook: Goldman Sachs predicts OPEC will ensure oil prices remain in the "80-100" range.

Recently, international oil prices have rebounded, approaching the level before the decline last Wednesday, due to the expectation of deeper production cuts by OPEC+ this weekend.

Looking back at oil prices this year, Goldman Sachs pointed out that despite demand exceeding their optimistic expectations, oil prices have still declined slightly. This is because the supply from non-core OPEC countries has been much stronger than expected, partially offsetting the production cuts by OPEC.

In its report last week, Goldman Sachs forecasted oil prices for 2024. It expects stable demand growth and low supply from core OPEC countries in 2024. As a result, the oil market may tighten at a moderate pace, but there will still be a significant amount of spare capacity to cope with the tightening impact, effectively delaying the supercycle of commodities.

In terms of specific prices, Goldman Sachs believes that OPEC will use its pricing power to ensure that Brent crude oil prices remain between $80 and $100. The put options of OPEC will maintain the lower limit of oil prices at $80 next year, while the spare capacity will keep the upper limit at $100. In addition, there will be a slight supply-demand gap in 2024, and a 700,000 barrels per day gap will push the average Brent oil price to $92 per barrel next year.

OPEC put options will ensure oil prices in the "80-100" range

Regarding oil prices next year, Goldman Sachs stated:

OPEC will ensure that Brent oil prices remain in the $80-100 range in 2024 by maintaining a moderate supply-demand gap and utilizing its pricing power. This range will mostly provide investors with strong spot premiums and arbitrage returns. At the same time, we also see the hedging value of oil in the event of supply disruptions caused by geopolitical factors.

Firstly, Goldman Sachs believes that Brent crude oil is unlikely to fall below $80 per barrel for three consecutive years.

1. OPEC put options may remain unchanged. The additional extension of production cuts by Saudi Arabia in April, June, and September 2023 indicates that OPEC is trying to maintain oil prices above $80-85 per barrel. Although the strength of the put options is not as strong as a year ago, prices continuously falling below $80 may result in a slower recovery of crude oil production by OPEC+.

2. The global economy is approaching a "soft landing," and the damage caused by core inflation to labor or oil demand is limited.

3. When oil prices fall, the demand for oil from the US public and private sectors will increase. The US Department of Energy has reiterated its commitment to replenish the Strategic Petroleum Reserve (SPR) and aims to purchase 6 million barrels of crude oil to supplement the SPR by January next year.

Secondly, Goldman Sachs believes that Brent crude oil is unlikely to sustainably rise above $100 per barrel next year.

1. The limitation of 6 million barrels per day of idle production capacity restricts the upward potential of future oil prices. With sufficient idle capacity, there is no need for a price increase to encourage the growth of long-term projects. Goldman Sachs still estimates a fair amount of $36 million for Brent crude oil prices at $74 per barrel.

2. It is unlikely that OPEC will push the term interest rate differential to extreme levels, which will reduce long-term residual demand for OPEC. Specifically, Goldman Sachs found that the energy crisis in 2022 boosted long-term supply from non-OPEC countries through offshore growth and reduced long-term oil demand by investing in oil substitutes (electric vehicles).

3. After Brent crude oil prices rose to nearly $100 per barrel in late September, the reduction in Chinese crude oil inventories and the decline in refinery profit margins have had an impact on oil demand, indicating that the price elasticity of crude oil for China and refineries is a key balance for demand.

A slight supply-demand gap will appear in 2024

From the perspective of supply and demand, Goldman Sachs predicts that there will be a slight supply-demand gap in 2024:

Strong demand, slower growth in US supply, and continuous decline in OPEC supply will lead to a slight supply-demand gap in 2024, estimated at 700,000 barrels per day. The supply-demand gap may push up the time spread (spot and near-month futures price spread), with Brent crude oil prices averaging $92 per barrel next year, or peaking at $95 per barrel in August next year.

The factors leading to the supply-demand gap mainly include three aspects. First, global overall economic growth, structural growth in emerging market economies, and recovery in aviation fuel demand. In this scenario, crude oil demand will increase by 1.6 million barrels per day in 2024. Goldman Sachs pointed out:

1. Based on the scenario forecast of strong economic growth, global GDP will grow by 2.6%, higher than the market's general expectations. Income growth, less drag from monetary tightening, and economic and manufacturing activity recovery. This relatively optimistic view of GDP is a key variable in the crude oil demand model.

2. Structural demand growth trend in emerging markets. Goldman Sachs predicts an increase of 1.4 million barrels per day in the region in 2024, including 450,000 barrels per day in China, 300,000 barrels per day in India, 150,000 barrels per day in the Middle East, and 200,000 barrels per day in other non-OECD Asian countries.

3. Recovery in aviation fuel demand, which will increase by 600,000 barrels per day next year. Global aviation fuel demand in the third quarter of this year is still 700,000 barrels per day lower than the third quarter of 2019. With the fading headwinds of destocking and economic normalization, it is expected that the demand for petrochemical products will accelerate towards stability.

The second factor is the slowdown in US supply growth. Goldman Sachs predicts that:

Non-core OPEC supply growth will slow to 1.5 million barrels per day in 2024, although the United States will continue to drive global supply growth in 2024, the total supply growth is expected to slow to 530,000 barrels per day. First, the continuous decline in the number of oil drilling platforms in the United States has led to a 21% decrease from the peak at the end of 2022. Secondly, US crude oil producers continue to adhere to capital discipline, and it is expected that the growth of crude oil production by US independent exploration and production companies will decrease from approximately 235,000 barrels per day in 2023 to 135,000 barrels per day in 2024, with reinvestment rates remaining at historically low levels. Furthermore, the potential well capacity in the Permian Basin (the main growth engine in the United States) has stopped increasing, reflecting deteriorating rock quality and improved technology.

Lastly, OPEC supply continues to decline, according to Goldman Sachs:

The production cuts by OPEC+ since the end of 2022 reflect their pursuit of spot premiums by maintaining low inventories. It is estimated that the production cuts by Saudi Arabia and the other eight OPEC+ countries in April, totaling 1.7 million barrels per day, have already increased Saudi Arabia's oil profits. Therefore, after the cuts in April, Saudi Arabia and the other eight OPEC+ countries may continue to maintain their production levels, and the cuts will take full effect in 2024.

Goldman Sachs predicts that OPEC is not eager to increase production due to the low oil prices, as commercial inventories in the OECD are only slightly below historical levels. Therefore, it is expected that Saudi Arabia will gradually lift the additional unilateral cuts of 1 million barrels per day starting from next year, and every two months from the third quarter of next year, 250,000 barrels per day of restrictions will be lifted.

In summary, Goldman Sachs believes that oil prices will remain in the range of $80-100 per barrel in 2024, and the three factors mentioned above may cause Brent crude oil prices to rise to $94 per barrel in the fourth quarter of 2024.

There may be unexpected situations in the following three cases: First, in the event of a moderate recession, Brent crude oil may be lower than the benchmark forecast by $17 per barrel; second, if non-OPEC supply exceeds expectations again, Brent crude oil may be lower than the benchmark forecast by $12 per barrel; third, in the event of a supply disruption, Brent crude oil may be higher than the benchmark forecast by $5 per barrel.

Refining sector capacity constraints

It is worth mentioning that although there is sufficient idle capacity in the upstream crude oil production, the downstream refining sector still faces capacity constraints. Goldman Sachs points out that the current global refining utilization rate is 85%, which is at the historical 90th percentile level. This structural tightness reflects four key factors:

First, since the late 2010s, the closure of refineries due to disruptions and the pandemic, totaling 7 million barrels per day, has suppressed global refining capacity.

Second, finished oil demand has reached its peak.

Third, weather-related disruptions are becoming more frequent, and the difference between crude oil supply quality and refined product demand types is putting pressure on the refining system.

Fourth, the combination of rising long-term demand uncertainty and ultra-long-term demand, coupled with the investment cycle limitations of refineries, has hindered the investment in new refineries. The average age of refineries in developed countries is 50 years, with a payback period of over twenty years, but the mismatch between continuous investment and returns hinders rebalancing. In the context of structural tightening, Goldman Sachs pointed out that refining capacity will only increase moderately in 2024-2025.

Despite a net increase in crude oil supply of 1.8-1.4 million barrels per day, it still exceeds the expected growth in refined product demand of 1.4-0.9 million barrels per day. During this period, even based on our forecast of a utilization rate of 84.6% in 2025, refining capacity is still vulnerable to impact. The tight capacity combined with distortions in cross-product demand means that refining margins will continue to exhibit differences.

Specifically, Goldman Sachs pointed out that gasoline refining margins are higher in the summer, and they hold a constructive attitude towards gasoline refining margins and a neutral attitude towards diesel margins.

In recent weeks, global gasoline refining margins have rebounded due to cost support, as we expected, benefiting from the shift towards diesel. The recovery of depressed gasoline positions may further improve gasoline refinery margins.

In relation to this, Goldman Sachs expects that US retail gasoline/diesel prices will rise along with wholesale prices, with prices increasing from the current $3.5 per gallon to $3.87-$4.28 per gallon in the summer of 2024.

As for diesel, we believe that the value of (European) diesel at current levels is limited and has converged with our forecasts. This is due to demand being hindered by warmer weather and long positions still posing significant resistance to initial positions, especially in the US heating oil market.

We maintain our bullish outlook on Northwest European diesel and US heating oil - Brent crude crack spreads at $25/$22 per barrel and $29/$26 per barrel, respectively, for cal24/25, as light crude shale offsets bearish weather in the winter.

Nevertheless, low inventories, high utilization rates, expensive freight, lighter sulfur content, and high global natural gas prices will result in diesel cracks significantly higher than the average level in 2019, at $16/$18 per barrel.