Oil’s extended reign? Adapting to a new era in oil markets
Digest
This episode of Goldman Sachs' "Exchanges" discusses the drivers of recent oil price volatility and the implications for investors and consumers. The conversation highlights the balance between supply and demand, with OPEC managing supply to align with demand growth. Despite geopolitical tensions, spare capacity in oil production keeps prices under $90 per barrel. The discussion then delves into long-term demand trends, with Goldman Sachs predicting a peak in oil demand around 2034, driven by India's rapid economic growth and the continued use of oil in petrochemicals and jet fuel. While electrification and EV adoption are expected to impact demand, the models account for these shifts and still project a million barrels per day average growth in oil demand through this decade. The episode also explores the refining industry, which is structurally tight and vulnerable due to refinery closures and low investment. This tightness is expected to lead to higher and more volatile refined oil product margins, impacting consumer prices. The episode concludes with a discussion on the implications of the upcoming US election for the energy complex, with a potential Republican sweep potentially leading to a modest upside for oil prices due to potential sanctions on Iranian oil supply. However, the episode emphasizes the importance of gold as a hedge against inflation risks, particularly in the context of potential tariffs and geopolitical escalations.
Outlines
Introduction and Oil Price Volatility
This Chapter introduces the topic of oil price volatility and the factors driving it. It discusses the recent fluctuations in oil prices, highlighting the role of geopolitical tensions, inventory builds, and OPEC's efforts to manage supply. The chapter also emphasizes the importance of spare capacity in oil production, which acts as a buffer against price spikes.
Long-Term Oil Demand Outlook
This Chapter focuses on the long-term outlook for oil demand. It discusses Goldman Sachs' prediction of a peak in oil demand around 2034, driven by factors like India's rapid economic growth and the continued use of oil in petrochemicals and jet fuel. The chapter also explores the impact of electrification and EV adoption on oil demand, highlighting how the models account for these shifts while still projecting a million barrels per day average growth in oil demand through this decade.
Refining Industry and Consumer Prices
This Chapter delves into the refining industry, highlighting its structural tightness and vulnerability due to refinery closures and low investment. The chapter discusses the implications of this tightness for consumer prices, explaining how refined oil product margins are expected to be higher and more volatile than crude oil prices. The chapter also explores the mismatch between supply and demand for different refined products, with diesel and jet fuel expected to be in deficit while gasoline is expected to be more balanced.
Implications for Oil Prices and the US Election
This Chapter discusses the implications of the long-term demand outlook, the refining situation, and the upcoming US election for oil prices. It highlights the uncertainty surrounding future oil prices, particularly due to low investment and the potential for geopolitical events. The chapter also explores the potential impact of a Republican sweep on the energy complex, with a potential modest upside for oil prices due to potential sanctions on Iranian oil supply. However, the chapter emphasizes the importance of gold as a hedge against inflation risks, particularly in the context of potential tariffs and geopolitical escalations.
Keywords
OPEC
The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of 13 oil-producing countries that coordinates and unifies petroleum policies of its member countries. OPEC's primary objective is to ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.
Oil Price Volatility
Oil price volatility refers to the fluctuations in the price of oil over time. These fluctuations can be caused by a variety of factors, including changes in supply and demand, geopolitical events, economic conditions, and speculation. Oil price volatility can have a significant impact on the global economy, as oil is a key input for many industries.
Electric Vehicles (EVs)
Electric vehicles (EVs) are powered by electric motors that are driven by batteries. EVs are becoming increasingly popular as a way to reduce greenhouse gas emissions and dependence on fossil fuels. The growth of EVs is expected to have a significant impact on the oil industry, as it will reduce demand for gasoline and diesel fuel.
Refining Industry
The refining industry is responsible for converting crude oil into usable products such as gasoline, diesel fuel, and jet fuel. The refining industry is facing a number of challenges, including declining investment, environmental regulations, and competition from alternative fuels. These challenges are expected to lead to higher and more volatile refined oil product margins.
India
India is a rapidly growing economy with a large and growing population. India's economic growth is expected to drive demand for oil, particularly for transportation fuel and petrochemicals. India is also expected to be a major driver of EV adoption in the coming years.
China
China is the world's largest consumer of oil. China's economic growth has been a major driver of global oil demand. However, China is also a leader in the development and adoption of EVs, which is expected to reduce its oil demand in the long term.
Gold
Gold is a precious metal that is often used as a safe haven asset during times of economic uncertainty. Gold is also a hedge against inflation, as its price tends to rise when inflation is high. In the context of the upcoming US election, gold is seen as a potential hedge against inflation risks, particularly in the context of potential tariffs and geopolitical escalations.
Geopolitical Risk
Geopolitical risk refers to the risks associated with political and economic events that can affect the global economy. Geopolitical risks can include wars, terrorism, trade disputes, and political instability. Geopolitical risks can have a significant impact on oil prices, as they can disrupt supply chains and create uncertainty about future demand.
Inflation
Inflation is a general increase in the prices of goods and services over time. Inflation can be caused by a variety of factors, including increased demand, supply chain disruptions, and government policies. Inflation can erode the purchasing power of money and can lead to economic instability.
US Election
The US election is a major event that can have a significant impact on the global economy. The outcome of the election can affect government policies, trade relations, and the overall political climate. The US election is also a major factor in oil price volatility, as it can affect the supply and demand of oil.
Q&A
What are the key factors driving recent oil price volatility?
Recent oil price volatility has been driven by a combination of factors, including geopolitical tensions, inventory builds, and OPEC's efforts to manage supply. The market has also been pricing in the possibility of geopolitical supply disruptions.
What is Goldman Sachs' long-term outlook for oil demand?
Goldman Sachs predicts that oil demand will peak around 2034, driven by factors like India's rapid economic growth and the continued use of oil in petrochemicals and jet fuel. While electrification and EV adoption are expected to impact demand, the models account for these shifts and still project a million barrels per day average growth in oil demand through this decade.
What are the challenges facing the refining industry?
The refining industry is facing a number of challenges, including declining investment, environmental regulations, and competition from alternative fuels. These challenges are expected to lead to higher and more volatile refined oil product margins.
What are the potential implications of the upcoming US election for the energy complex?
A potential Republican sweep could lead to a modest upside for oil prices due to potential sanctions on Iranian oil supply. However, the episode emphasizes the importance of gold as a hedge against inflation risks, particularly in the context of potential tariffs and geopolitical escalations.
Is oil an effective hedge against inflation in the current environment?
While oil has historically been a good hedge against inflation, in the current environment, gold is seen as a more effective hedge due to the potential for tariffs, pressure on the Fed to keep policy loose, and geopolitical escalations.
What are the key takeaways from this episode regarding the future of the oil market?
The oil market is expected to remain relatively balanced in the near term, with OPEC managing supply to align with demand growth. However, long-term demand is expected to peak in the mid-2030s, driven by factors like India's rapid economic growth and the continued use of oil in petrochemicals and jet fuel. The refining industry is facing structural challenges that are expected to lead to higher and more volatile refined oil product margins. The upcoming US election could have a modest upside for oil prices, but gold is seen as a more effective hedge against inflation risks.
Show Notes
Rising incomes and slowing electric vehicles sales are slowing the world’s transition away from oil. Goldman Sachs Research’s Daan Struyven and Nikhil Bhandari discuss the supply-and-demand drivers shaping the oil market and what they mean for investors and consumers.
For more insights read Peak oil demand is still a decade away, Which commodities are the best hedge for inflation?, and Why are EV sales slowing?
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