Oil: Shape of forward curve does not point to weakening fundamentals – Goldman Sachs

In view of the analysts at Goldman Sachs, despite the market’s focus on US crude inventories setting new record highs, the shift in the shape of the Brent crude forward curves has been relatively modest.

Key Quotes

“The spot to 5-year price differential is back to its January level (only explaining 40% of the $6/bbl decline in oil prices) and this pullback likely reflects overly optimistic consensus expectations for the pace of inventory draws.”

“Further, the front end of the Brent forward curve, which reflects current inventory dynamics, has strengthened slightly during the sell-off. This is consistent with the oil market making progress in its rebalancing: (1) US crude inventories will lag the rebalancing as shale ramps up and US storage is the cheapest available with non-crude US inventories and non-US inventories down yoy, (2) the monthly official data now show that OECD inventories drew by a surprisingly large amount in 4Q16, and (3) the ongoing increase in EM consumer inventories will help absorb excess OECD inventories.”

“While the shale production rebound has surprised to the upside, the slightly larger compliance to the OPEC cuts than we had initially expected and the higher 2016 realized demand level lead us to continue to forecast a normalization in OECD inventories through 2017. This leads us to forecast a rotation of the forward curve with Brent spot prices trading 10% above 5-year forward prices by 4Q17. The stock draws would be accelerated if the strength in activity indicators translates into stronger oil demand growth than our above-consensus 1.6% forecast.”