d OECD commercial oil inventories have “barely drawn since the war began,” reflecting a smaller-than-expected supply deficit and the concentration of inventory declines in strategic reserves, oil stored on water and China.
Global oil inventories have been experiencing a significant decline since the outbreak of the war, with the Organization for Economic Cooperation and Development (OECD) commercial oil inventories barely drawing since the conflict began. This development reflects a smaller-than-expected supply deficit and the concentration of inventory declines in strategic reserves, oil stored on water, and China.
According to a recent report by Goldman Sachs, global landed oil inventories have decreased to 8.6 billion barrels from 9.1 billion barrels before the war. However, these inventories remain above the estimated minimum operational storage levels. This indicates that while oil inventories are low, they are not at a critical point that would necessitate an immediate increase in prices.
Goldman Sachs has released a report outlining its forecasts for oil prices in the coming year. The bank's strategists assume that Middle East oil supplies will continue to adapt, with production gradually recovering during the second half of 2027 as pipelines become operational. This recovery is expected to be a gradual process, with production levels increasing over time.
The report highlights that low visible global oil inventories and low OECD strategic reserve levels do not necessarily indicate an imminent increase in prices. When visible global inventories reached an all-time low in November 2024, Brent was trading at $76 per barrel. This suggests that the market has already priced in the impact of low oil inventories, and that prices may not increase as much as expected.
Upside and Downside Scenarios for Oil Prices
Goldman Sachs has outlined two scenarios for oil prices in 2027: an upside scenario and a downside scenario. Under the upside scenario, Brent could exceed $120 per barrel if average Gulf oil production in 2027 remains 4 million barrels per day below pre-war levels. This scenario is driven by the potential for intensified shipping attacks in the Strait of Hormuz and Red Sea, which could disrupt oil supplies and drive up prices.
On the other hand, under the downside scenario, Brent could fall into the $60s during 2027 if average Gulf production rises to 1 million barrels per day above pre-war levels. This scenario is driven by the potential for increased oil production in the Gulf region, which could lead to a surplus of oil and drive down prices.
Recommendations for Hedging Geopolitical Risk
Goldman Sachs continues to recommend hedging geopolitical risk through deferred March 2027 to December 2027 European diesel timespreads. According to the bank, those spreads would increase by more than 100% if persistent Russian or Middle Eastern refinery outages keep the nearby nine-month spread around current levels. This suggests that investors should be prepared for potential price increases due to geopolitical risks.
What to Watch Next
The ongoing conflict and its impact on oil inventories and prices will continue to be a major focus for investors and policymakers in the coming year. The development of the situation in the Middle East and the potential for intensified shipping attacks will be closely watched. As the situation unfolds, it is essential to monitor the impact on oil prices and the potential for price increases or decreases.
The recommendations by Goldman Sachs to hedge geopolitical risk through deferred European diesel timespreads will also be closely watched. Ultimately, the outcome of the conflict and its impact on oil inventories and prices will have significant implications for the global economy and energy markets.
In conclusion, the current state of oil inventories and prices is complex and influenced by various factors. Investors and policymakers should be prepared for potential price increases due to geopolitical risks and monitor the situation closely in the coming year.
Goldman Sachs has identified intensified shipping attacks in the Strait of Hormuz and Red Sea as the most likely trigger for the upside scenario. This highlights the importance of monitoring the situation in the Middle East and the potential for disruptions to oil supplies.
Additionally, the bank's base case assumes Gulf production will average 0.5 million barrels per day below pre-war levels. This suggests that investors should be prepared for potential price increases due to the potential for disruptions to oil supplies.
The bank's downside scenario, which assumes average Gulf production rises to 1 million barrels per day above pre-war levels, highlights the potential for increased oil production in the Gulf region. This could lead to a surplus of oil and drive down prices.
In terms of price-sensitive Chinese crude imports, Goldman Sachs estimates that they are about 30% lower year over year. This could limit potential price increases and is an important factor to consider when monitoring the situation.
Finally, Goldman Sachs notes that risks to its forecasts remain "significantly tilted to the upside on net, especially near-term." This highlights the potential for unexpected disruptions to oil supplies and the importance of monitoring the situation closely in the coming year.
