Dramatic change in the oil supply reaction function still ahead – Goldman Sachs

Anil Panchal FXStreet

Early Wednesday morning, Goldman Sachs (GS) came out with their upbeat analysis of oil prices with key comments like, “The market has far overshot the likely impact of the latest variant on oil demand.”

“Given the large uncertainties at this time, we await further news on the variant's development and additional restrictions imposed before refreshing our supply and demand balances and oil price forecasts,” adds GS.

The US-based bank also expects the structural repricing higher due to the dramatic change in the oil supply reaction function lying ahead.

Additional important quotes

Negative gamma effects are when swap dealers increasingly need to sell futures to hedge the oil price risk taken on by selling put options to producers.

The lack of discretionary buying activity in the face of an uncertain new COVID variant has therefore left prices in free-fall and pricing in a dire demand outlook.

This would represent any of these extreme outcomes: (1) not a single plane flying around the world for three months, or (2) half as intense as the 2020 global lockdown, or (3) a world even worst-off than before vaccinations: the combination of global jet demand falling to last winter's level (-1 mb/d), a twice as large hit to EU demand as the Alpha variant last winter (-2 mb/d) and twice as large a hit to Chinese demand as the Delta variant this summer (-1 mb/d).

WTI refreshes intraday high

Following the release, WTI crude oil prices extend the latest bounce off late August levels, refreshing intraday high around $67.40-45.

Read: WTI consolidates the day's worst drop in 3-months

Author

Anil Panchal

FXStreet

Anil Panchal has nearly 15 years of experience in tracking financial markets. With a keen interest in macroeconomics, Anil aptly tracks global news/updates and stays well-informed about the global financial moves and their implications.

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