Wall Street Spots Buying Opportunity After Oil’s Price Rout

Oil’s recent price rout is likely transitory and offers an entry point into a market that’s been surging this year, according to Goldman Sachs Group Inc. and Morgan Stanley analysts.

Thursday’s price plunge came amid a combination of factors, including signs of softening physical markets in Asia, renewed lockdowns in Europe and an unwinding of long positions by commodity trading advisers. But fundamentals haven’t changed that much, analysts say. If anything, the recent sell-off could be just what the market needed to attract more buying.

The sell-off is a “transient pullback in an otherwise large oil price rally and a buying opportunity,” Goldman analysts including Damien Courvalin said in a March 18 report. “Despite this sharp move lower, we still forecast a rapid oil market rebalancing in coming months.”

Oil’s worst week since October came after prices had rallied more than 30% this year ahead of the rout. Vaccine breakthroughs late last year and accompanying hopes of a full-fledged demand rebound helped break prices out of a months-long trading range, while gains were further accelerated this year as the Organization of Petroleum Exporting Countries and its allies keep output restrained.

Those factors still largely hold, and the market should face an average supply shortfall of 1.6 million barrels a day, allowing inventories to normalize during the third quarter, Morgan Stanley analysts Martijn Rats and Amy Sergeant wrote Friday in a note. With the selloff, the analysts said there’s now a “compelling entry point” for wagers on strengthening Brent timespreads -- where traders bet on the price difference between contracts of different months.

“Don’t mistake a correction for a derailment,” JPMorgan Chase & Co. analysts including Natasha Kaneva said Thursday in a note. “Though not much has changed in the fundamental picture this week, the price move was likely accentuated by a washout of investor length which has been steadily rising since late last year.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.