The last point is key and is why as it updates its supply and demand forecasts, Goldman believes that the oil market will remain in unsustainable deficits at current prices, and is why the bank forecasts that the oil market still requires oil demand destruction on top of the ongoing economic slowdown. This, the bank warns, requires a sharp rebound in retail fuel prices – the binding constraint to balancing the oil market – back to $150/bbl Brent equivalent prices, equivalent to US retail gasoline and diesel prices reaching $4.35 and $5.45/gal by 4Q22.
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Before we dig deeper into the Goldman analysis, let’s take a quick detour into the key question of the abovementioned oil price disconnect: what is the right oil price?
As Goldman explains, at the conceptual level two prices matter for modeling the oil market:
- (1) the retail price of fuels paid by consumers as it drives demand elasticity and
- (2) the crude price received by producers as it drives supply elasticity.
Up until 2021, retail prices followed a stable relationship to Brent prices, leading the bank and its peers to use Brent prices as a common input for both sides of their fundamental modeling. This is however no longer the case, due to significant distortions to each of the steps required to transform crude oil coming out of the ground into fuels consumed by producers.