Despite Sell-Off, Crude Oil Prices Will Stay at $120 a Barrel in Second Half of the Year - Goldman Sachs

Despite crude oil prices tumbling due to concerns over a likely recession and the resulting demand destruction, economists at Goldman Sachs say prices will stay well above $100 for months to come.

According to Goldman economists, even under an 'adverse scenario', Brent crude's fair value will be in the range of $120 in the next six months. Even in 2023, Brent will stay above $110, the economists said, reported. However, these projections are lower than Goldman's earlier outlook of $135 and $125 a barrel, respectively.

Worst Case Scenario

In the worst-case scenario, prices will be $105 in the second half of 2022 and $90 in 2023, they said.

Crude oil prices
Crude oil prices Flickr

Despite prices tilting downward in the recent weeks, Goldman economists believe that low inventories will be the key driver or prices in the near term. If the UAE and Saudi Arabia are able to produce an extra 500,000 barrels per day, the spare capacity will be dented severely, a factor that will buoy the prices.

According to Goldman Sachs strategists Jeffrey Currie and Damien Courvalin, the bullish view was 'stress-tested' on the basis of higher supply and weaker demand. And they are retaining the bullish view despite the recent sell-off.

Thursday Plunge

Oil prices plunged more than $4 on Thursday as investors priced in a highly possible US rate hike, which will suppress oil demand. Analysts expect the the US Federal Reserve to rate interest rates by 100 basis points rate hike this month as it battles a four decade-high high inflation.

Brent crude futures for September was at $95.52 a barrel on Thursday. West Texas Intermediate crude for August delivery was trading at $91.63 a barrel.

crude oil storage tanks
crude oil storage tanks reuters

Goldman Sach's projection runs counter to an outlook shared by Citigroup last week that said oil prices will drop sharply by the end of the year, irrespective of whether there is a recession or not.

The analysts at the investment bank are the only ones in the pack that think oil is headed for a fall within months. In the past several weeks, analysts have been bullish on oil, some insanely so. Citi strategist Francesco Martoccia said last week that oil prices could fall to $65 a barrel by December.

The Citi experts' expectations are pegged on hopes that there will not be a heavy disruption in Russian crude supplies. "We actually don't see a supply crunch in the making," Martoccia had said.