scorecardGoldman Sachs slashes its oil price target as banking fiasco boosts recession fears
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Goldman Sachs slashes its oil price target as banking fiasco boosts recession fears

Matthew Fox   

Goldman Sachs slashes its oil price target as banking fiasco boosts recession fears
Stock Market2 min read
  • Goldman Sachs slashed its oil price forecast because the ongoing banking crisis is boosting fears of a recession.
  • Analysts now expect oil to trade at $94 per barrel by the end of the year, down from a prior forecast of $100.
  • Oil prices have plunged 15% since Silicon Valley Bank collapsed earlier this month.

Goldman Sachs cut its oil price forecast, saying the collapse of Silicon Valley Bank earlier this month sparked an ongoing banking crisis that is raising the rising risk of a recession.

Analysts now expect oil prices to trade at about $94 per barrel in the next 12 months. While that represents potential upside of 39% from current levels, the new forecast is down from Goldman's prior view of $100 per barrel.

The investment bank previously had an oil price target as high as $140 per barrel this time last year in the immediate aftermath of Russia's invasion of Ukraine, as investors feared a potential oil supply shock.

But Russian exports proved resilient, China's economy rebounded slowly, and a milder-than-expected winter has led to reduced demand. Oil prices are down by about 50% from a March 2022 high of $130 per barrel.

According to Goldman, ongoing banking stress, recession fears, and an exodus of investor flows should weigh on oil prices despite the reopening of China.

"Historically, after such scarring events, positioning and prices recover only gradually, especially long-dated prices," a Goldman Sachs team led by Daan Struyven wrote in a note over the weekend. "Our adjustment also reflects somewhat softer fundamentals, namely higher-than-expected near-term inventories, moderately lower demand, and modestly higher non-OPEC supply."

Slower economic growth could materialize due to the collapse of Silicon Valley Bank, as the banking industry is likely to implement tougher lending standards going forward, according to Goldman. Since the bank crisis started, oil prices have plunged 15%.

"While triggered by recessionary concerns about oil demand, we believe that the jump in interest rate volatility, and related VAR-driven liquidity shocks have exacerbated the selloff, as investors took off losing oil positions," Struyven said.

Also not helping is the fact that the Biden administration is in no rush to replenish the Strategic Petroleum Reserve (SPR), according to a top Biden adviser. Some investors expected that the replenishment of the SPR would serve as a floor for oil prices this year, but so far that's not the case.

The SPR currently holds 371.6 million barrels of oil, representing its lowest level since the 1980s and about 43% less what it held in 2020.

While oil prices aren't yet moving in the direction that Goldman expects, it sees the potential for upside as recession fears are likely overblown, meaning future demand for oil will be higher than many expect.

"Our economists still believe that the US and Europe will avoid recession given relatively elevated capital buffers in the banking system, and ongoing policy support... Oil markets have likely turned excessively pessimistic about the near-term growth outlook... Oil prices should recover this year under most of the likely scenarios for the global economy," Goldman concluded.