Goldman Sachs makes STUNNING Brent crude oil price prediction

[00:00:00]Goldman Sachs Global Commodities Research Co-Head Don Striven. Don, Brent would have to jump about 25% from the levels it's at at the moment.

[00:00:09]Give me a sense of what needs to happen to get it to 120 a barrel.

[00:00:12]>> Yeah, thanks Lisa for having me. To be clear, our base case is actually that Brent prices moderate to around $80 in the fourth quarter, but that assumes de-escalation in the Middle East. If shipping flows through Hormuz were to remain disrupted, our model suggests that Brent might indeed exceed $120 a barrel with WTI going to just under 120.

[00:00:33]>> Okay, WTI is what trades in the United States. Maybe we can put that up at the moment. I can look at the moment and see that we've got WTI at $87.11 a barrel.

[00:00:43]>> Yeah.

[00:00:44]>> So, what does that translate for gasoline per gallon retail?

[00:00:50]>> Yes, so at the moment the US average retail gasoline price is in the low four dollars per per gallon. In that upside scenario where Hormuz remains disrupted, retail prices could approach $5 a gallon likely in the high high fours.

[00:01:07]And in fact, the gap between product prices and and crude prices is quite high by historical standards because the refining system is is very tight and even tighter than the crude market. Not only because of challenges for refineries to run in the Middle East, also because 80% of Russian refineries are offline at the moment.

[00:01:24]>> Okay, that is a whole different piece of the story. Russia versus Ukraine, what's going on there. We'll get to that in a second, but I do want to just bring up Kharg Island. That is that key oil depot just off the coast of Iran in the Persian Gulf. President Trump has talked about the potential to seize Kharg Island, take control of it. It's hard to predict what that would mean to the oil markets. Would you then see oil skyrocket or drop if the Americans were in charge? But if the Americans took it, that means that we have a ground war, boots on the ground to take Kharg Island though?

[00:01:58]>> Yeah. I think it would raise uncertainty further about the geopolitics and supply from the Middle East. So, I would expect volatility and prices to like likely rise further at least in the short term if that were to happen. Uh what I would note is that the uh US blockade of Iranian oil exports uh which has been re-imposed, reinstated, had been quite effective in restricting uh Iranian uh oil exports. So, it's not clear that seizing Kharg Island is is necessary to reduce Iranian exports and to gain leverage uh in the uh negotiations with Iran from a reducing oil revenue perspective for Iran.

[00:02:33]>> Let's talk about a different waterway and that is the Red Sea. Because the Houthis, the terror group that the Iranians fund, have now decided that from Yemen they are going to attack anything that some of the things that move through the Red Sea. How does that play into the picture because that was sort of Saudi Arabia's side exit for transporting cargo and oil?

[00:02:56]>> Absolutely. It's a new uh upside risk to to oil prices. The rerouting of Saudi flows via the the pipelines uh to the Red Sea has been a very important mechanism to limit the drop in Saudi production and to limit the upside pressure uh to oil prices. Um if you were to see uh frictions um in the southern part of the Red Sea, the Saudis may respond by trying to send their oil up north via via the Suez Suez Canal. But that would mean that it would take maybe 4 weeks longer before these barrels arrive in Asia. So, so less supply uh in the short term and and there could even be risks around the Suez Canal itself as well.

[00:03:38]>> a hedge that you formulate, that you put together?

[00:03:41]>> Yeah. So, we recommend uh as a geopolitical hedge to investors to go long diesel, to go long the refining space uh because we think that the refining market is even tighter than the crude market. And you do not only have the upside to refining prices from persistent geopolitical uncertainty in the Middle East. You also have that extra upside from persistent low supply in Russia.

[00:04:02]>> Uh, diesel, where is it right now and how much has it jumped?

[00:04:06]>> Yeah, so diesel prices year-to-date are up 70% or so, significantly more than crude. The the average US diesel retail price stays above $5 per gallon and we think some of that that tightness is really structural.

[00:04:21]>> Is this correct? Record high $60 a barrel?

[00:04:24]That's refining margins or European >> Exactly.

[00:04:27]>> Okay, so but the actual per gallon here for diesel right now is >> Just over over $5 a gallon.

[00:04:34]>> Well, so we're >> for for the consumer.

[00:04:36]>> Yeah. It's a it's it's tough because that's transports. That's really affecting the transports.

[00:04:41]>> It's key for agriculture, logistics, groceries. It's a key input in so many products.

[00:04:46]>> And really quickly, Russia is an important piece. Russia is the plus, by the way, in OPEC plus.

[00:04:52]>> Yeah.

[00:04:52]>> Ukraine and that whole situation, they are taking aim at Moscow at the moment.

[00:04:57]So, how does that figure into the picture?

[00:04:59]>> It's another reason why diesel prices are rising. 80% of Russian refineries are currently offline, 80% and Russia tends to specialize in producing diesel.

[00:05:09]So, less diesel supply, higher diesel prices.

[00:05:12]>> Don, let's hope we don't get to 120 a barrel, at least for the consumer out there. That would be bad picture for inflation. Thank you so much.