Goldman Sachs lowers oil forecast due to new outbreaks of COVID in China and a G7 oil price cap in Russia

Goldman Sachs recently lowered its oil forecast for the fourth quarter of 2022 due to several factors.

These include rising Covid outbreaks in China and a lack of clarity regarding the Group of Seven (G7) nations’ intention to cap Russian oil prices. A group of economists at Goldman Sachs stated:

“The market is right to be anxious about the fundamentals going forward due to significant Covid cases in China and a lack of clarity regarding the G7′ implementation of the price cap.”

Goldman Sachs’ new fourth-quarter oil forecast now stands at $100 per barrel after a $10 reduction.

Goldman Sachs oil forecast influenced by anticipated reduction in Chinese imports.

Over the weekend, China recorded three Covid deaths, the country’s first since May. Against this backdrop, Goldman expects more closures in the East Asian country, which is also the world’s largest oil importer. Due to the expected negative impact of these shutdowns on oil demand, Goldman estimates that this equates to a shortfall of 2 million barrels per day. The banking giant also draws a direct comparison to the oil production cuts imposed by OPEC+ last month.

Following growing concerns about Covid in China, the country’s capital, Beijing, has stepped up its measures over the past three days. A note from Goldman’s team of economists addressed this development, saying:

“China’s Covid cases spiked between April and December, but the reaction function of the new policy is unknown…we are lowering our Chinese demand forecast by 1.2 [million de barils par jour] for the quarter (to 14.0 mb/d), anticipating further blockages from here on out.”

In addition, Goldman economists also said that current crude demand in the East Asian country is lower than Goldman’s forecast for October through November. According to the banking giant’s analytical team, this shortfall is about 800,000 barrels per day.

Russian supply factor

Russia’s higher-than-expected oil production volumes and exports are also influencing Goldman’s downward oil revision. This increase in production and export capacity comes just two weeks before the European Union ban takes effect early next month. Summarizing the development from an investor perspective, Goldman notes that “investors were disappointed by higher-than-expected production and export flows from Russia. This is with only two weeks left before the EU embargo takes effect on crude, alongside the G-7 price cap, for which more details are expected to be announced next week.“

In May, EU leaders agreed to ban 90 percent of Russian crude imports by the end of the year as a new punitive measure against the Eastern European country. The embargo is part of the bloc’s sixth round of sanctions against Russia for invading Ukraine on Feb. 24. However, some fear the ban will further aggravate an already tight energy market, which has contributed to soaring energy prices.