Goldman: China Concerns Another Speed Bump On The Road Higher

Goldman Sachs note that “over the last ten years, Brent prices have averaged a ~10% drawdown in November. While it's tempting to blame a lack of liquidity for another capitulation, we believe the market is right to be anxious about forward fundamentals, due to significant Covid cases in China and a lack of clarity on the implementation of the G7's price cap.”

• “While confidence remains high in a Q223 China reopening and the structural bullish underinvestment thesis, the path between now and next spring remains highly uncertain. China's Covid cases are at Apr ‘22 highs, yet, the new policy reaction function is unknown. However, the logic of exponential virus spread, means further lockdowns will likely be required, if full reopening is not feasible.”
• “Meanwhile, Russia oil export flows are being maintained at elevated levels as inventories are drained ahead of the imminent implementation of the EU crude embargo.”
• “The net impact is a ~1.5 mb/d loosening of Q422 balances, lowering our Q422 Brent forecasts by $10/bbl, to $100/bbl. Markets have instead priced a ~2 mb/d softening over the next 3 months, as these fundamental developments occurred during a seasonally low liquidity period, with discretionary positioning at post-pandemic highs, activating CTA sell triggers, exacerbating the move lower.”