Goldman Says Spreads Between WTI Crude Oil Contracts Are Strengthening

Global crude oil demand may have exceeded supply in the past two months as inventories stored on tankers fell to an 18-month low, Goldman Sachs Group Inc. said.

“Now that floating storage has dropped to its lowest levels in over 18 months, we expect to experience declining onshore inventories in coming months,” Goldman Sachs analysts including David Greely and Stefan Wieler said in a report today. “Given that world demand tends to increase seasonally in the second half, we would expect the draw on world inventories to accelerate.”

Oil held on ships may have dropped by as much as 40 million to 45 million barrels in June and July, in part due to the clearing of a “large portion” of Iranian floating storage, Goldman said.

“The June-July discharge of floating storage suggests that the draw at sea has more than offset the build on shore, which the International Energy Agency estimates at 21 million barrels,” Goldman analysts said.

World oil demand exceeded supply by 600,000 barrels a day, or 36.9 million barrels more than normal in June and July, based on the IEA estimate of a 13.3 million barrels draw on combined onshore OECD inventories and global floating storage, Goldman said in the report.

West Texas Intermediate crude time spreads, the difference between monthly futures contracts, have strengthened, suggesting a tighter physical oil market, Goldman said.

Goldman said that the time spread from the first to the 60th month gained as much as $10 a barrel to trade at about minus $8 to minus $10.

“We continue to expect the WTI forward curve to flatten in the second half, lifting prompt WTI prices into the $85-$95 a barrel range,” Goldman said.

The company reiterated its recommendation to buy December WTI crude futures, which traded up 44 cents to $77.38 a barrel at 11:49 a.m. on the New York Mercantile Exchange.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net Brian Murphy in London at bmurphy74@bloomberg.net

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