Goldman Sachs has long been bullish on the energy space and their latest commodity research note only reconfirms this bullish stance. The firm upped their estimate for Brent Crude due to what they believe is overestimated spare capacity:
“Saudi Arabia has announced that it will cushion the Libyan supply losses, but we think that production was already significantly above the reported levels in November and December. We believe that Saudi production could be 0.5-1 million b/d higher than the official numbers suggest, which would imply that OPEC spare capacity has already dropped below 2 million b/d. This pushes forward the drawdown of OPEC spare capacity by about six months. Consequently, we raise our 2Q11Brent forecast by $4.50/bbl to $105/bbl.”
Goldman is recommending that traders hedge petroleum exposure via ICE Gasoil (via their latest Commodities and Strategy Research note):
Consumers: Global inventories drew substantially in 2H2010, and we expect US inventories to continue to draw to more normal levels in 2011. With the supply-demand balance in a seasonally adjusted deficit and robust world economic growth expected in 2011 and 2012, we expect OPEC spare capacity will need to return to the market in 2011. As OPEC spare capacity is drawn down, we expect a structural bull market to return to the oil market, with substantially higher prices. Consequently, we believe that forward price levels offer good hedging opportunities for consumers in calendar 2011/2012, despite the recent rally.
Refiners: Refining margins have recently showed counter-seasonal strength after a period of weakness following the sharp May sell-off. However, we expect refining margins to remain under pressure owing to the large increase in refining capacity in Asia. As the light-heavy spreads have already widened, we expect complex oil refiners to return from maintenance and increase production, which would put pressure on simple refining margins relative to WTI prices. As a result, we would view any renewed rise in long-dated refinery margins in 2011 as a selling opportunity for refinery hedgers. For 2011 and beyond, we believe that crude will be the bottleneck in the system, rather than refining; this would squeeze margins from the crude side through backwardation, suggesting that refiners should also then look for potential time-spread hedges.
Producers: While we continue to expect crude oil prices to move higher in 2011, limiting tactical opportunities, the risk-reward trade-offs for producer risk management programs will likely improve again as prices move higher over the coming months.
Long Gasoil: Buy March 2011 European ICE Gasoil (current value $966.25/mt; first suggested at $791.75/mt; $209.75/mt gain including a $35.25/mt gain rolled from a long January 2011 European ICE Gasoil recommendation. We continue to expect improving fundamentals to provide additional support to prices.
Source: Goldman Sachs