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Oil price outlook: why Goldman thinks WTI could hit $25/bbl in May

We examine why Goldman Sachs analysts think US Crude may climb higher over the next month.

WTI oil price Source: Bloomberg

Optimism returns to oil markets

From trough to peak – between 28 April and 1 May – West Texas Intermediate’s (WTI) front-month futures contract rose as much as 103% – to a weekly high of US$20.48 a barrel.

This staggering turnaround comes as OPEC+’s 9.7 million barrel per day production cut officially kicked-off on 1 May; demand has improved; and as we wrote last week, US Crude storage is not filling as quickly as market participants were forecasting.

At its last traded price, WTI’s June contract remains elevated, last trading up 85 cents, to US$19.69 a barrel.

Brent Crude futures – the international oil benchmark – have also trended higher in recent days, with the July contract last trading at US$26.6 a barrel.

Speaking of the WTI-Brent spread, which blew out considerably in April, Reuters columnist John Kemp noted that:

‘WTI prices are vulnerable to dislocation when the tank farms and pipelines at Cushing threaten to become full, and have disconnected from Brent several times since 2008.'

Though this ‘dislocation’ has eased in recent days, concerns over Cushing’s storage capacity remain. According to the latest data from the US Energy Information Administration (EIA), as of the week ending 24 April, Cushing is 81% full, up from 76% from the week prior.

The EIA is set to release their next Weekly U.S. and regional crude oil stocks and working storage capacity report on 6 May.

Click here to discover J.P. Morgan's preferred ASX-listed energy equities.

Oil price outlook: a bullish forecast for WTI

In a research note published last Friday, Goldman Sachs analysts, contending that oil fundamentals have improved in recent weeks, argued that WTI could be set to rise further over the coming month.

‘Supplies have started to decline quickly, with signs of demand improving ahead of lockdown measures being eased. While the inflection into a deficit is still a few weeks away, it now appears likely that the market is passing its test on storage capacity,’ the investment bank’s analysts said.

Looking at how the situation would likely play out, Goldman analysts said:

‘With the market’s rebalancing now in motion, we expect a three-stage oil price rally, from relief, to cyclical tightening, and finally structural repricing.’

‘We believe the recent rally can extend further in May, back to cash-costs levels ($25/bbl for WTI).’

The investment bank did however warn that elevated levels of volatility were likely to remain.

How to trade oil markets: long and short

What do you make of the current situation: do you see bullish or bearish opportunities? Whatever your opinion, you can trade WTI spot and futures, as well as Brent spot and futures – long or short – through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) WTI spot using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘Oil - US Crude’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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