Rutgers Newark Oil Projections Demand and Supply Curve Paper

Description

i give you all the materials and i only need you to help me get the SUPPLY AND DEMAND CURVE and SOME EXPLANATIONS. TY???That’s all I need.
Briefly discuss developments in the crude oil market and your outlook, using the microeconomic concepts discussed in class. What is your outlook for oil prices? Give your projection for December 2021 and December 2022
in terms of $/barrel? Your analysis should include the following:

Your analysis should incorporate an analysis of past oil price developments and your assessment of current markets. The historic data for WTI and Brent can be obtained from the St. Louis Fed Fred website at https://fred.stlouisfed.org/categories/32217 (Links to an external site.). Please be sure to look at both the nominal and real price movements
In developing your forecast, you can use regression analysis, but be sure to specify your model. Some studies on oil price forecasting have been included. The dependent variables need to be fully analyzed.
In addition to the attached articles, you can refer to interesting articles from the International Energy Agency: https://www.iea.org/
You should incorporate your projections for demand and supply forces, with graphs. Show projected shifts in the demand and supply graphs to support your forecasts.
A brief regression analysis and diagnostics discussion will be held in class. You can use any software, including excel, to conduct your regressions.
In addition to the attached articles, you can refer to interesting articles from the International Energy Agency: https://www.iea.org/

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24 October 2021 | 10:28PM EDT
Oil
Demand still a near-term tailwind
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n
We recently raised our oil price forecast on the view that the market was not
only cyclically tight but also structurally undersupplied. A common driver to our
short- and long-term bullish view is our above-consensus demand forecast (GS
+0.8/+2 mb/d in 2H21/2022 vs. IEA).
Callum Bruce
We estimate that global oil demand has surpassed 99 mb/d and will shortly hit
its pre-COVID level of 100 mb/d as Asia rebounds post the Delta wave. In
addition, we estimate that gas-to-oil switching may be contributing at least 1
mb/d to oil demand, with current gas forwards incentivizing this through winter.
While not our base-case, such persistence would pose upside risk to our $90/bbl
year-end Brent price forecast.
Romain Langlois
n
Importantly, we expect demand to remain near pre-COVID levels this winter
even under average winter temperatures. Seasonality (+0.8 mb/d Dec-21 vs.
Sep-21) and our jet demand recovery (+0.5/+1.8 mb/d in Dec-21/Jul-22
respectively vs. Sep-21) will continue to drive demand higher, ensuring stock
draws until mid-2022.
n
Finally, we believe that neither the Chinese property sector challenges nor
current oil price levels will derail this demand view. First, Chinese demand
remains strong, with potential COVID lockdowns likely to be brief. Further,
gas-to-oil substitution in power and LNG trucking as well as higher coal mining
are likely to be net bullish shocks relative to the potential demand losses from
lower housing starts.
n
Second, we estimate that oil prices are not high enough to generate demand
destruction given falling energy intensity in DMs and rising income levels in
EMs. Speci?cally, we estimate that the 2022 Brent price would need to reach
$110/bbl to balance the de?cit we expect through 1Q22 via the demand side
alone.
+1(212)902-3053 | callum.bruce@gs.com
Goldman Sachs & Co. LLC
Damien Courvalin
+1(212)902-3307 |
damien.courvalin@gs.com
Goldman Sachs & Co. LLC
+1(801)741-5448 |
romain.langlois@gs.com
Goldman Sachs & Co. LLC
Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certi?cation and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.
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n
Goldman Sachs
Oil
Mobility data and inventory draws continue to point to further oil demand gains,
with our estimate of current demand and forecast for growth in coming months
both well above the IEA and consensus expectations (Exhibit 3). This reinforces our
short-term, demand-driven, cyclical bullish oil view, with our year-end Brent forecast
of $90/bbl and risks skewed to the upside.
n
Speci?cally, we estimate that demand is above 99 mb/d (Exhibit 1), with Asia-Paci?c
countries driving most of the recent gains as local mobility surged post the Delta
wave (Exhibit 2), as well as due to gas-to-oil switching. In addition, demand has
continued to improve in US/Canada, with mobility plateauing at high levels
elsewhere. For example, despite Spain’s still lagging economic recovery, passenger
road-fuel demand is already above 2019 levels.
n
As such, even with demand close to reaching its pre-COVID 100 mb/d level, we
believe there remains plenty of room for growth due to the unwind of mobility and
international travel restrictions (with jet fuel demand still 2.5 mb/d below 2019
seasonals) as well as a still robust pace of economic growth over 2021-22 vs. post
GFC trends (even following our economists’ recent downgrades).
n
While Covid-19 variants posed risks to oil demand this year, speci?cally to our jet
fuel demand outlook, the global vaccine roll-out is now increasingly protecting
against mass hospitalization (Exhibit 4), meaning healthcare systems will likely
manage future waves without needing strict mobility restrictions to be reimposed
outside of China.
n
In this report, we lay out the key drivers to our constructive near-term oil demand
view: gas-to-oil substitution, winter seasonality, the expected further rebound in jet
demand as well as address why we do not see our $90/bbl price forecast nor China
as representing downside risks to our above-consensus demand forecast.
Exhibit 1: Demand is approaching pre-Covid levels of 100 mb/d for
the ?rst time
Exhibit 2: Asian countries (inc. China) have rapidly rebounded
following the Delta wave
GS high frequency global demand tracking vs. monthly supply and
demand balances (mb/d).
Regional passenger vehicle demand vs 2019 levels
110
110
105
105
100
100
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n
30%
20%
10%
0%
-10%
90
-20%
-30%
-40%
ME
Source: Google COVID-19 Community Mobility Reports, Apple, IEA, JODI, OAG, Kpler, IIR,
Thomson Reuters Eikon, Goldman Sachs Global Investment Research
24 October 2021
Asia
Latam
Africa
Europe
Oct-21
Sep-21
Jul-21
Aug-21
Jun-21
Apr-21
May-21
Mar-21
Jan-21
Feb-21
Dec-20
Oct-20
Nov-20
Sep-20
Jul-20
80
-50%
Aug-20
85
Jun-20
80
Petchem
Other diesel
Gasoline
GS Demand
Apr-20
85
Marine fuel
Jet
Passenger diesel
Pre-covid demand path
GS Supply
May-20
90
95
Mar-20
95
Feb-20
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Demand reaching pre-Covid levels, likely to surprise consensus to upside
NAM
Source: Google COVID-19 Community Mobility Reports, Apple, IEA, JODI, Goldman Sachs Global
Investment Research
2
Goldman Sachs
Oil
Exhibit 3: Despite a supply-driven structurally bullish view, it’s
demand where we remain out of consensus
Exhibit 4: The vaccine rollout has created enough protection
against hospitalisations that further lockdowns are less likely
GS vs IEA quarterly demand and supply expectations (kb/d). Note: IEA
does not have forecasts for OPEC and therefore global supply for 4Q21
onwards
Effective protection rate against hospitalisations (%)
3,000
90
2,500
80
70
2,000
60
1,500
50
1,000
40
500
30
20
0
10
-500
0
-1,000
OPEC
Supply
OECD
Source: IEA, Goldman Sachs Global Investment Research
non-OECD
Demand
Global
India
Russia
US
China
Mexico
EU
Brazil
Indonesia
Japan
UK
Source: JHU CSSE, Our World In Data, John Hopkins Centers for Civic Impact, Goldman Sachs
Global Investment Research
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Non-OPEC
24 October 2021
3
Goldman Sachs
Oil
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Gas-to-oil switching a boon over winter
n
After 18 months of COVID related downside risks to oil demand, gas-to-oil (G2O)
substitution is now a clear winter tailwind. Gas spot and forward prices in Europe
(Exhibit 5) and Asia (Exhibit 6) continue to signal signi?cant switching potential, as
the market prices demand destruction to preserve gas and coal inventories ahead of
winter.
n
We introduce four methods to assess this G2O impact so far, with their simple
average leading us to estimate that switching is generating c.1 mb/d of extra oil
demand at present (Exhibit 11), with lower and upper bounds of 0.8 and 1.3 mb/d
respectively. This is above the c.0.7 mb/d we were base-casing over Sep-Nov in our
latest balance update and provides upside risk to our oil price forecasts of at least
$2/bbl using our inventory-based modeling framework (Exhibit 12). Given the low
level of global oil inventories, such price impact is further likely skewed to the
upside.
n
First, we look at dirty product ?ows into regions we see as likely to be candidates
for such switching (countries in Europe ex. Russia, Asia, and the Middle East). Since
late July, these ?ows have averaged up 250 kb/d yoy, vs. ?at in the months before
(Exhibit 7). Considering this is just a small sample of countries, doesn’t measure
LPG and distillate ?ows, nor domestic destocking of such fuels for burn, we scale up
this estimate by 3x to extrapolate a global number of c.750 kb/d since late July.1
n
Second, we extrapolate a comparable number from global residual fuel oil stock
draws (seasonally adjusted), versus their pre-power spike average. Global residue
stocks are drawing incredibly fast, and have accelerated by 300 kb/d (seasonally
adjusted) vs their June-July pace. We similarly extrapolate this to imply G2O
n
Third, we compare our high frequency estimates of stock draws vs. our recently
updated supply-demand balance expectations (adjusting for our assumed G2O
switching impacts at the time). While this measure shows stock draws surprising to
the upside by 2 mb/d, as noted above, mobility has also beat our expectations by 0.5
mb/d over recent weeks, implying a 1.5 mb/d likely upper bound to current G2O
switching.
n
Fourth, we leverage a combination of high-frequency (mostly daily) power
generation data by fuel type (across a range of countries with available data), as well
as dirty product ?ows (across just a handful of others for which we both lack data
and strongly expect some G2O switching to occur) to generate a more bottom-up
calculation. As this measure will miss some degree of local destocking and non-fuel
oil burn (in those without power generation data) we would likely still consider this a
1
This is the product of a 2x scaling for fuel oils share in the liquids burn (the rest being distillates and LPGs)
that we assumed in our previous research and 1.5x for domestic destocking as well as switching occuring in
other countries outside this relatively small basket.
2
Once again, we multiply the raw number by 3x to account for only a small coverage of global fuel oil stocks
in our sample (just c.40% at 85mb vs 200+mb globally) and for other products (LPG, distillates) being used in
power.
24 October 2021
4
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switching nearing 1 mb/d (Exhibit 8).2
Goldman Sachs
Oil
lower bound. Exhibit 10, shows the result of this country-level exercise. Despite
some surprising lack of evidence of G2O switching in Egypt, Japan, and others, we
still estimate a minimum of 0.8 mb/d of switching occurring vs. counterfactual levels
in these countries. The relative completeness of this measure compared to the ?rst
two above warrants a smaller multiplier to extrapolate to a global ?gure.
Nevertheless, this method implies c.1.2 mb/d of G2O switching is currently
occurring in our view.
Exhibit 5: Current forwards are pricing G2O switching for all except
the most inef?cient distillate plants in Europe
Exhibit 6: Asia LNG (JKM) meanwhile is well beyond switching
economics given no carbon prices
Fuel parity prices using TTF gas prices as numeraire (USD/mmbtu)
Fuel parity prices using JKM LNG prices as numeraire (USD/mmbtu)
45
40
40
35
35
30
30
25
25
20
LSFO parity
HSFO parity
JKM
Diesel parity
LSFO parity
HSFO parity
Jul-22
Oct-22
Apr-22
Jan-22
Jul-21
Oct-21
Apr-21
Jan-21
Jul-20
Oct-20
Apr-20
Jan-20
Jul-19
Oct-19
Apr-19
Jan-19
Jul-18
Oct-18
Apr-18
Jan-18
Jul-17
Oct-17
Jan-17
Jul-22
Oct-22
Apr-22
Jan-22
Jul-21
Oct-21
Apr-21
Jan-21
Jul-20
Oct-20
Apr-20
Jan-20
Jul-19
Oct-19
Apr-19
Jan-19
Jul-18
Diesel parity
LPG parity
Source: ICE, CME, Platts, Goldman Sachs Global Investment Research
Source: ICE, CME, Platts, Goldman Sachs Global Investment Research
Exhibit 7: Dirty product ?ows suggest at c.750 kb/d of switching
has been occuring since late July
Exhibit 8: Residual product draws have deepened signi?cantly of
late, implying similar rates of G2O at present
Global gas-to-oil substitution extrapolated from dirty product ?ows
Gas-to-oil switching extrapolated from fuel oil stocks draws (kb/d)
1400
1
1200
0.8
1000
0.6
800
600
0.4
400
0.2
200
0
0
-0.2
-200
-0.4
-400
-0.6
4wk average yoy dirty product flows to likely consumers
Extrapolated to global gas-to-oil substitution
Gas-to-oil switching extrapolated from fuel oil stocks (mb/d)
The extrapolation is large as the data doesnt cover LPG, diesel substitution, nor domestic
destocking
The extrapolation is 3x due to only small coverage of fuel oil stocks, as well as not covering other
switchable fuels such as LPGs and distillates
Source: Kpler, Goldman Sachs Global Investment Research
Source: EIA, PAJ, PJK ARA, IE Singapore, Fujairah
24 October 2021
5
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TTF
Oct-18
Apr-18
0
Jan-18
5
0
Jul-17
5
Oct-17
10
Apr-17
10
Apr-17
15
15
Jan-17
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20
Goldman Sachs
Oil
Exhibit 9: Global oil stock draws continue to surprise to the upside,
suggestive of higher than anticipated gas-to-oil switching
Exhibit 10: GS tracking of high frequency power generation data
and dirty product ?ows suggests a lower bound of around 800 kb/d
Difference between global stock draws and our most recently published
balance, adjusted for prior expectations of gas-to-oil switching (kb/d)
GS tracking of liquids burn via high frequency power generation
statistics as well as dirty product ?ows (kb/d)
900
800
700
600
500
400
300
200
100
0
Source: Kpler, EIA, PJK ARA, PAJ, IE Singapore, Oilchem, Fujairah, IEA, JODI, Goldman Sachs
Global Investment Research
This will still miss diesel and propane burn in countries without power generation data as well
as local stock draws in those with only ?ows data
Source: National sources, Kpler, Goldman Sachs Global Investment Research
Exhibit 11: We think gas-to-oil switching has likely hit 1mb/d
Various measures of gas-to-oil switching (kb/d)
Exhibit 12: Current switching estimates are consistent with our
previous research given current price levels although Europe
seems to be burning less than expected
Liquids displacement of gas in power in Europe (TTF) and Asia/Middle
East (JKM) under different price assumptions (mb/d)
TTF (USD/mmbtu)
2000
Brent (USD/bbl)
1000
500
0
-500
-1000
-1500
10
15
20
25
30
35
40
75
0.00
0.00
0.00
0.33
0.50
0.53
0.53
80
0.00
0.00
0.00
0.00
0.39
0.50
0.53
85
0.00
0.00
0.00
0.00
0.18
0.44
0.50
90
0.00
0.00
0.00
0.00
0.00
0.24
0.50
Extrapolated from fuel oil stocks
Extrapolated from dirty product flows
Difference between realised and forecast deficit (adjusted for mobility)
Extrapolated from available power generation data
JKM (USD/mmbtu)
Source: Kpler, EIA, PAJ, PJK ARA, IE Singapore, Fujairah, National sources
24 October 2021
10
15
20
25
30
35
40
75
0.00
0.00
0.52
0.76
0.80
0.80
0.80
80
0.00
0.00
0.15
0.68
0.76
0.80
0.80
85
0.00
0.00
0.00
0.52
0.76
0.80
0.80
90
0.00
0.00
0.00
0.15
0.52
0.76
0.80
55cbf6c25af611d78703a354ff838bbb
1500
Brent (USD/bbl)
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Liquids burn generation
Source: Goldman Sachs Global Investment Research
6
Goldman Sachs
Oil
n
While we expect G2O switching to continue to dominate news ?ow in the
short-term, this boost to oil demand will come to pass under our base-case. Under
average winter weather, we forecast 1Q22 TTF and JKM prices well below current
levels, and below G2O switching economics, with coal too likely to normalize as
supply ramps up signi?cantly across most major producers over the coming months.
n
Nevertheless, starting from the current fall shoulder demand months (after the US
summer driving season, Indian monsoons, and China’s Golden Week), demand will
seasonally move materially higher into the winter heating season. From this
seasonal in?uence alone, we expect c.800 kb/d extra demand in Dec-21 vs Sep-21
(Exhibit 13).
n
Meanwhile, recent news on travel bans being lifted in the US, Australia, Singapore,
Thailand, among others comforts us in our forecast for rising jet demand through the
winter. Monthly demand gains have been consistently beating seasonal norms since
May-21 (Exhibit 14), while the usual downward revisions to OAG’s short-term ?ight
schedule forecasts are once again diminishing following the Delta wave (Exhibit 15).
n
Our bilateral-route, vaccination-based demand model (Exhibit 16) utilizing varying
regional vaccination thresholds has broadly performed well and continues to foresee
an EM-led reopening in 1H22. We expect that jet fuel demand will grow to 5.3/6.6
mb/d in Dec-21/Jul-22 respectively, +0.5/+1.8 mb/d vs Sep-21 (but still -1.9/-1.1 mb/d
vs 2019).
Exhibit 13: Seasonality from the fall shoulder months, as well as a
recovery in jet drives most of the demand increase over the next
few quarters
Exhibit 14: Jet demand continues to recover vs seasonal norms
MoM implied jet fuel consumption changes vs seasonals (kb/d)
Changes in demand vs Sep-21 (kb/d)
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Seasonality and jet fuel are additional winter tailwinds
4000
3500
3000
2500
2000
1500
1000
500
0
Seasonality/trend
Jet fuel
Dec-21 vs Sep-21
Other demand
Source: OAG, IEA, Goldman Sachs Global Investment Research
24 October 2021
Total
Jun-22 vs Sep-21
Source: OAG, IEA, Goldman Sachs Global Investment Research
7
Goldman Sachs
Oil
Exhibit 16: We expect a continuous ramp up in jet fuel demand from
now until next summer’s seasonal peak as borders ?nally reopen
Cumulative revisions to jet fuel forecasts implied from OAG ?ight
schedules (kb/d)
GS bilateral-route, vaccination-based modelled jet fuel demand (kb/d),
with latest datapoints implied from OAG and daily ?ight tracking
Source: OAG, IEA, Goldman Sachs Global Investment Research
Source: OAG, IEA, Goldman Sachs Global Investment Research
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Exhibit 15: Revisions to ?ight schedules are also falling again, post
Delta
24 October 2021
8
Goldman Sachs
Oil
n
While current global demand estimates are tracking to the upside, with the
assistance of G2O switching, concerns have risen over downside risks to Chinese
demand due to the country’s property market and energy issues. Our assessment
points to such China risks remaining manageable and small in the context of an oil
market in such a sizable de?cit, with no obvious detrimental impact so far to oil
consumption.
n
With ongoing challenges to the China property market, high-frequency sector
activity indicators have been slowing. The direct linkages to the energy markets are
small, however, with direct consumption of oil and natural gas in the construction
sector amounting to 140 kb/d (Exhibit 19). The indirect impacts through the wealth
and income channel are likely to be more signi?cant, but even in a worst-case
scenario, this would represent only 300 kb/d of demand downside, leveraging our
economists’ GDP ?gures in their scenario analysis.
n
In fact, our high-frequency China oil demand tracking (Exhibit 18) remains robust so
far with congestion c.4% above 2019 levels post the Golden Week holiday (Exhibit
17). What’s more, we believe that despite the recent power cuts and impacts to
industrial activity, oil demand is likely instead supported by switching to diesel
powered generators (vs coal or gas-powered grid electricity) and diesel engines in
LNG trucks, as well as by a ramp up in coal production.
n
While China has little capacity to burn petroleum liquids on its utility grid system, it
is understood that China’s industrial plants have relied on local diesel generators
when power cuts have occurred in previous winters, and have continued to invest in
such back-up generation capacity due to recent grid reliability concerns. For
example, c.30 GW of diesel generators are sold annually in APAC, most of this in
China. As an illustration of their potential, assuming even very conservative product
lifetimes (3 years) and utilization rates (5%), these would still amount to 150 kb/d of
additional diesel demand.3 As such, we would expect a boost to Chinese oil demand
via this channel, although one that is admittedly hard to quantify or track.
n
More importantly, China is home to over half of global LNG powered trucks (Exhibit
19), consuming c.500 kboe/d worth of natural gas. Many of these have dual engine
capabilities and are currently heavily incentivized to run on diesel oil instead. We
conservatively estimate that c.50-100 kb/d of switching may be occurring through
this mechanism.
n
In addition, in order to resolve the current power issues, China is demanding an
almost c.10% ramp up in domestic coal production. While the direct linkages to oil
demand are small – the sector consumes just 60 kb/d of oil directly: mostly LPG and
diesel – we estimate c.400 kb/d of diesel demand is consumed for trucking the coal
to power stations across the country4. Thus, we estimate the current plans to boost
3
A three year product lifetime means the ?eet is estimated to be three times annual sales.
4
Typical journey of 600 miles each of interstate and intrastate travel (round journeys) to get from main
producing provinces of Inner Mongolia/Shanxi/Shaanxi to the Eastern coast of Hebei from where coal is
24 October 2021
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China risks manageable
Goldman Sachs
Oil
production could boost oil demand 20-40 kb/d via the mining sector diesel trucking
demand.
Exhibit 17: China’s roads have never been busier
Exhibit 18: China’s demand has so far remained very robust despite
facing property and power market headwinds
China average seasonal congestion (ratio of actual travel time vs time
without congestion)
Ratio, 7-day moving avg
1.9
1.8
Ratio, 7-day moving avg
1.9
Traffic congestion index in 100 cities in China
(ratio of actual travel time to ‘free flow’ travel time, higher=more congested)
1.8
17000
16500
16000
1.7
1.7
1.6
1.6
1.5
1.5
15000
1.4
1.4
14500
1.3
14000
13500
2018
1.3
Oct 17: +3.8%*
2019
1.2
2020
1.2
1.1
2021
1.1
2021 (unsmoothed)
1.0
Jan
Feb
Mar
Apr
May
*Percentage change relative to 2020
Jun
Jul
Aug
Sep
1.0
Oct
Nov
Dec
15500
13000
Jan-21
Feb-21 Mar-21
Apr-21 May-21 Jun-21
Implied demand (7dma)
Source: Wind, Goldman Sachs Global Investment Research
Jul-21
Aug-21 Sep-21 Oct-21
Implied demand (14dma)
Source: Kpler, ICIS, SCI, Oilchem, Goldman Sachs Global Investment Research
Exhibit 19: Direct exposures of oil demand to challenged industries is
small
China demand breakdown by end-use acccording to IEA annual data
(mb/d)
Total demand
Transformation processes
Energy industry own use
Final consumption
Industry
Mining and quarrying
Construction
Manufacturing
Iron and steel
Chemical and petrochemical
Non-ferrous metals
Non-metallic minerals
Transport equipment
Machinery
Food and tobacco
Paper, pulp and printing
Wood and wood products
Textile and leather
Industry not elsewhere specified
Transport
World aviation bunkers
Domestic aviation
Road
Rail
Pipeline transport
World marine bunkers
Domestic navigation
Transport not elsewhere specified
Residential
Commercial and public services
Agriculture/forestry
Fishing
Not elsewhere specified
Non-energy use
Diesel
3.12
0.01
0.05
3.06
0.32
0.06
0.11
0.13
0.01
0.01
0.01
0.07
0.01
0.02
0.01
0.00
0.00
0.00
0.02
2.18
0.00
0.00
1.79
0.06
0.00
0.20
0.30
0.04
0.06
0.19
0.31
0.00
0.00
0.00
Total
13.23
0.15
1.17
11.92
1.42
0.06
0.14
0.75
0.01
0.57
0.01
0.10
0.01
0.02
0.01
0.01
0.00
0.00
0.47
6.18
0.25
0.57
5.05
0.06
0.00
0.50
0.47
0.04
0.98
0.31
0.37
0.00
0.00
2.66
Natgas
5.13
0.99
0.52
3.62
1.83
0.03
0.00
1.65
0.21
0.50
0.09
0.27
0.08
0.24
0.12
0.04
0.01
0.09
0.15
0.50
0.00
0.00
0.50
0.00
0.01
0.15
0.00
0.00
0.85
0.25
0.00
0.00
0.00
0.18
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For the exclusive use of PJAIN@MACROFINANALYTICS.COM
China high frequency implied demand (runs+net product
imports-product stock changes, kb/d)
Source: IEA, Goldman Sachs Global Investment Research
typically then shipped to coastal power plants. Based on 85% and 50% of interstate and intrastate tonnage
being railed respectively. 6mpg truck ef?ciency assumed in line with US EIA truck ef?ciency ?gures. 4000
million metric tonnes pa of production and 35 metric tonnes per truck.
24 October 2021
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Goldman Sachs
Oil
24 October 2021
n
With supply constrained across many commodities and inventories fast drawing,
several markets (coal, gas, power, zinc) have started to price demand destruction as
the balancing mechanism of last resort. With similar constraints on the supply side
for oil, and OPEC+ unwilling to provide the market with extra supply, we tackle the
question of whether oil prices have reached levels that could bring the market into
balance via the demand-side of the equation. Our answer is that oil prices are still
too low for any meaningful impact on demand.
n
Our macro modeling suggests a 10% rise in oil prices weakens demand (a quarter
later) by 200 kb/d. As such, we would need prices to rise to c.$110 /bbl (vs Brent
3Q21 average of $73/bbl) to sti?e demand enough to balance the market de?cit we
currently see in 1Q22 given our expectation that OPEC+ continue on the current
path of +0.4 mb/d per month increases in quotas. We do not base-case such an
outcome as we expect a continued reliance on inventory drawdowns until surpluses
emerge in 2H22, albeit delays to a return of Iran production (vs our 2Q22 base-case)
would make such a balancing mechanism increasingly likely.
n
In fact, even at current retail prices, fuel has rarely been so affordable to the average
American driver over the last 60 years (Exhibit 20). As a share of personal
consumption expenditures, US consumers spend similar amounts on gasoline as
they did during 1999 when Brent averaged $18/bbl, as nominal increases in GDP per
capita have broadly kept pace with nominal retail gasoline price increases. On our
calculations, Brent prices would need to rise to almost $150-200/bbl before
consumers spend a similar share of their income as the 2008/1980s peaks
respectively, when demand destruction was ?nally helping bring the market back
into balance.
n
We see a similar, albeit less pronounced, wealth effect in EM economies. While EM
nominal per capita incomes have risen rapidly in recent decades (up 9/7/5 times in
2021 than in 2000 for China/India/Brazil), real consumption of oil per capita has also
increased strongly (gasoline demand up 120-370% vs 2000 for these countries). In
addition, many EMs have removed subsidies and undertaken price liberalization
since 2014. Finally, while Europe fuel demand is barely up since 2000, this wealth
effect has also been muted by sharply higher fuel taxes in order to meet ambitious
environmental goals.
n
In Exhibit 21 and Exhibit 22, we show that outside of the US and China (where
income growth has been so dominant and a high degree of passenger miles uses
electri?ed public transport), oil prices are nearing levels where further upside could
start generating demand destruction. Net, based on our modeling and aggregating
across countries, we estimate that Brent prices would have to rise to
$110/$125/$150 for fuel expenditures as a share of income to reach the same levels
as during 2012, 1975-85, and its 2008 peak respectively. Overall, signi?cant upside
to current prices remains before meaningful demand destruction occurs, with the
US the most insulated this time around to a sharp increase in prices, a reversal from
the summer of 2008.
11
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Oil demand destruction lies at higher prices
Goldman Sachs
Oil
Exhibit 20: Oil prices are well below the demand destruction levels
of the 1980s or even 2008, when observed through their share of US
consumers’ expenditures baskets
Exhibit 21: Rapidly growing oil consumption per capita in some
EMs (e.g. Brazil, India) has offset rapid per-capita GDP growth
(unlike China)
Energy as a share of personal consumption expenditure (PCE, rhs) vs
nominal retail gasoline prices (USD/gal, lhs)
Estimated fuel expenditure share of GDP (%)
10.0%
4.50
4.00
3.50
3.00
8%
8.0%
7%
2.50
7.0%
2.00
6.0%
1.50
5.0%
1.00
9%
9.0%
6%
5%
4%
3%
2%
4.0%
0.50
3.0%
1%
0%
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
0.00
US gasoline pump prices ($/gal, inc. tax)
India
Source: EIA, BEA, Haver, Goldman Sachs Global Investment Research
Brazil
China
US
Other EM
EU
Global Weight
Source: EIA, Haver, Wind, Eurostat, GPP, Goldman Sachs Global Investment Research
Exhibit 22: Prices would likely need to hit $110-120/bbl to create
meaningful demand destruction
Brent oil price equivalents to reach same expenditure share (vs GDP) as
previous eras
200
180
160
140
120
100
80
60
40
20
0
Brent price today
Post 2008 peak
2008 peak
1980s peak
(World)
1980s peak (US)
55cbf6c25af611d78703a354ff838bbb
For the exclusive use of PJAIN@MACROFINANALYTICS.COM
Energy share of US personal expenditures (rhs)
Equivalent price today
In 1980s comparison, we assume no changes in taxes/subsidies due to lack of complete data
Source: EIA, IEA, IMF, Goldman Sachs Global Investment Research
24 October 2021
12
Goldman Sachs
Oil
Disclosure Appendix
Reg AC
We, Callum Bruce and Damien Courvalin, hereby certify that all of the views expressed in this report accurately re?ect our personal views, which have
not been in?uenced by considerations of the ?rm’s business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
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