Emerging Market Demand to Support Oil Prices, Goldman Sachs Says

Oil prices will be supported by emerging market demand, a lack of spare supply and improvements in transporting U.S. output, Goldman Sachs Group Inc. said.

Relatively low oil inventories around the world, limited spare capacity in the Organization of Petroleum Exporting Countries and continued demand growth among emerging-market economies will sustain the market’s current “backwardation,” where prices for immediate and near-term delivery exceed those for later, Goldman Sachs said in a report today.

The premium of the front-month April Brent contract over May was at 47 cents today on the ICE Futures Europe exchange in London. The grade has been in backwardation since July.

Goldman Sachs also forecast that a glut of crude at Cushing, Oklahoma, the main U.S. depot for the New York Mercantile Exchange, will shift to a “large deficit” in the second quarter. Completion of refinery maintenance and new pipeline capacity from the Permian basin to the U.S. Gulf Coast starts will divert crude away from Cushing, the report said.

“Substantial pipeline debottlenecking in North America during the second quarter is expected to support second and third quarter West Texas Intermediate prices,” the Goldman Sachs analysts said.

As a result of these changes, Goldman Sachs predicted a three-month return of 6 percent for petroleum investments, and said the price spread between Brent and WTI will narrow substantially to average $7.50 a barrel this year. Brent was at a $18.44 a barrel premium to WTI today.