Despite an already massive run off the lows of last year, oil looks to be heading higher. While many on Wall Street have been positive on the commodity, one firm was among the first to hop on the bandwagon and has been on it since early last fall. With the reopening of the economy serving as a huge tailwind, the analysts at Goldman Sachs are forecasting the biggest jump in demand ever. They anticipate a 5.2 million barrel per day rise over the next six months. Toss in low interest rates and a weak dollar, and you have the perfect storm for a continued rise.
In a new and comprehensive report on commodities, Goldman Sachs notes that one of the interesting parts of the oil story is that the rising demand scenario was well flagged to the market, and the firm questions why this was not priced in earlier. It’s not like the reopening and dollar weakness tailwind comes as a big surprise to anybody who follows the oil markets.
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Goldman Sachs analysts said this when discussing rising demand:
The level of global oil demand has been flat – around 95 million barrels per day over the past six months. While this was initially a positive surprise through the large second wave of COVID infections this past winter, it has become a speed bump to the recovery in oil prices so far this spring as demand levels flattened in India, Latin America, and parts of Europe. Importantly, we expect a significant rebound in global oil demand in coming months, key to our forecast for higher oil prices by this summer. First, we see a weakening link between lockdowns and economic activity/mobility due to more targeted policies and the ongoing ramp-up in vaccinations (with warmer weather likely to help as well). Cases already appear to be inflecting in Brazil, Chile and Europe, and plateauing in the first hit Indian state of Maharashtra. We are in turn seeing clear evidence of higher mobility in countries of advanced vaccination (US, Israel, UK), with for example US gasoline demand near 2019 levels and domestic jet demand up 20% since March. As a result, we expect global oil demand to increase sharply by June, from 94.5 millions barrels per day currently to 99 million barrels per day in the third quarter of this year, as the pace of vaccination accelerates in Europe, finally unleashing pent-up travel demand.
We screened the Goldman Sachs Americas Conviction List, which contains the firm’s top stock picks for clients, looking for energy companies and found four that look like very solid ideas now. While these picks are rated Buy at Goldman Sachs, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Devon Energy
This stock may be offering one of the best value propositions among the Goldman Sachs ideas. Devon Energy Corp. (NYSE: DVN) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs) in the United States and Canada. It operates approximately 19,000 wells.
The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.
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