Oil: The darkest hour is just before the dawn – GS

In its latest research note on oil markets, analysts at Goldman Sachs argue that upside risks to global demand growth still persists and that market will rebalance sooner than later.

Key Highlights:

US crude inventories have built well above consensus expectations and seasonal levels so far in January, with today’s EIA data featuring the second largest weekly crude build on record.

We view imports as the key driver to these large builds and as the simple reflection of the 4Q16 global oil market surplus of more than 0.5 mb/d.

Given the relatively high compliance to the proposed cuts so far, we believe that this import channel will reverse from March onward.

As a result, we do not view the recent excess US builds as derailing our forecast for a gradual draw in inventories, with in fact the rest of the world already showing signs of tightness.

Such US builds however support our view that the end-2016 starting point of the rebalancing was one of still rising inventories.

As a result, the draws will start from a high base and need sustained cuts to normalize and generate backwardation, with WTI likely to lag Brent and both lagging Dubai.

Importantly, macro data available so far this year suggests that the strong growth momentum of late 2016 is continuing, with global manufacturing PMIs at their highest level in six years in January.

This creates upside risk to our above consensus 1.5 mb/d 2017 global demand growth forecast and could help accelerate rebalancing of the oil market.