Is Goldman Sachs Now Being Too Bullish on Oil?

If you wonder how and why economists and analysts can make changes so fast on their energy and commodities outlooks, Goldman Sachs might be among the questioning on Monday, May 16, 2016. After having taken extreme bearish calls in prior weeks and months, Goldman Sachs has become less bearish in the oil patch. In short, this is not the biggest bullish oil price recovery call.

One additional driver of oil was on growing Nigerian oil output disruptions, and the fires in Canada taking oil off the market is another continued issue. WTI for June settlement was last seen up $1.51 (3.2%) at $47.72 on Monday.

Damien Courvalin, who is listed as the head of energy research and as a senior commodity strategist at Goldman Sachs, is credited for driving oil prices higher. Again, investors and energy price watchers need to take this in stride. There is also the warning of another oil glut coming in the next year in this same research call.

Courvalin sees oil averaging $45.00 per barrel in the current quarter. His call made back in March was for $35.00. He sees oil rising to as much as $51.00 per barrel in the fourth quarter of 2016. This is above the prior $45.00 or so call.

The VanEck Vectors Oil Services ETF (NYSEMKT: OIH) was last seen up 3.1% at $27.41 with a bullish move in oil on Monday. This ETF tracks oil services providers with three top stocks (Schlumberger, Halliburton, Baker Hughes) making up over 40% of the ETF. The VanEck Vectors Oil Services ETF has a 52-week range of $20.46 to $38.24.

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Where this gets tricky is that oil production will rapidly be turned back on as the price of oil rises. For that reason, Courvalin sees oil coming back down to $45.00 in the first quarter of 2017. Unfortunately for the oil bulls, the $45 target is lower than the prior $55 call.

As a reminder, it was just last year when Courvalin suggested that $20 oil was possible in his “There Will Be Blood” note. This more bullish, or less bearish, move may sound wishy-washy to some investors. Still, most predictions were not for oil to even go anywhere under $30 per barrel — and it did, with $26 getting closer and closer to that $20 downside number. Courvalin said:

This forecast revision reflects our long held view that expectation for long-term surpluses can create near-term shortages and leaves us cyclically bullish but long-term bearish.

We believe that the industry still has further to adjust and our updated forecast maintains the same 2016 to 2017 price level that we previously believed was required to finally correct both the barrel and capital imbalances, and eventually take prices to $60 per barrel.

Courvalin believes the rebalancing of the oil market has begun. While the market had moved into oversupply, his take is that a supply deficit will help keep oil from falling handily again. That decline in production from earlier in the year was cited as the main reason – much more than demand.

The United States Oil (NYSEMKT: USO) ETN, which can have tracking disparity outside of certain trading sessions and around futures roll dates, was last seen up 3.25% at $11.74 on Monday. Its 52-week range is $7.67 to $20.80.