ALEXANDRIA, Va.—Oil prices have surged in the U.S. in recent weeks, with Brent crude up 35% since May 1. But Goldman Sachs predicts that prices will fall in coming weeks due to one billion barrels of excess oil and lower-than-expected demand, reports Business Insider.
U.S. crude oil posted its sharpest monthly gains on record in May when the price per barrel surged by almost 90% for the month to settle at about $35. When the market opened on Tuesday, the price of a barrel was $38-plus, but analysts at Goldman Sachs think that rally may now be nearing its end.
"We now forecast a pull-back in prices in coming weeks," the analysts, led by Damien Courvalin, reported in a forecast published just two days after the cartel of top oil-producing nations, known as OPEC Plus, agreed to extend record output cuts through July.
The team said that demand is lagging behind expectations, and there are still about one billion barrels of excess oil. In addition, some U.S. producers that turned off wells in response to low prices are now turning the tap back on. Goldman believes "such an activity restart is premature given the exceptional level of OPEC spare capacity and with the inventory overhang barely dented."
Goldman Sachs’ short-term forecast for Brent based on those factors is $35 a barrel. For U.S. crude, known as West Texas Intermediate, the bank forecasts a price of $34 a barrel from April through June and $40 for the last three months of the year.
As recovering economies reopen, demand is recovering, but the process will be gradual. The world used 20% less oil in April—about 20 million barrels per day less. In May, demand was down about 15 million barrels per day, which the analysts said was more than they expected.
During the peak summer travel months of June and July, Goldman estimates demand will be down 11.5 million barrels per day and 8.5 million barrels per day, respectively, partly because of "a slightly slower than expected restart in jet demand for these months in spite of a rapid recovery in non-commercial flights."
"The inventory overhang remains significant and uncertainty remains high for the forward supply and demand outlooks," Courvalin's team wrote. "The inventory normalization takes time and requires patience."
The analysts expect about 500 million barrels to be drawn down from July through November, at which point "a sizable portion of this inventory will need to be rolled forward."