Oil prices have collapsed! However, Goldman Sachs has discovered anomalies behind the sharp drop, with a huge divergence between spot and futures market demands. Once inventories bottom out, oil prices are expected to make a significant reversal.

On Tuesday, WTI crude oil fell by about 5%, trading at $65.27 a barrel, hitting a new intraday low since December 2021. Brent crude also fell by 4.4% during the day, breaking below $69 for the first time since December 2021, marking the first time it has fallen below the $70 per barrel threshold since then.

Since September, international crude oil prices have dropped by nearly 10%, with a cumulative decline of 22% from their peak in April this year, entering a technical bear market.

Various analyses point to factors such as ample supply in the crude oil market, demand concerns, and rampant speculative short selling as triggers for this round of oil price plummet. However, Goldman Sachs sees a different picture in the spot market.

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On September 10th, Goldman Sachs analyst Yulia Zhestkova Grigsby stated in the latest report:

We are once again witnessing an unprecedented divergence between the physical oil market (where demand remains quite resilient) and the paper oil market (where funds and CTAs have never been so pessimistic).

As shown in the figure below, net long positions in crude oil by hedge funds have hit a historical low, meaning the level of pessimism has reached a historical high:

But in the spot market, Goldman Sachs said that due to declining production and recovering demand, net supply has decreased, in stark contrast to the futures market:

Despite macro factors triggering selling, our traceable net supply fell by 0.6 million barrels per day last week, due to production declines in Russia and Canada and our forecast of a moderate recovery in Chinese demand.

In sharp contrast to the stronger physical demand, financial demand for oil has plummeted to a historical low, with an average decline of 7 million barrels per day over the past two months.This divergence may be a harbinger of a reversal in oil prices, with Goldman Sachs estimating that the average price of Brent crude oil for the next quarter will be $77 per barrel, which is nearly a 12% rebound from the current price:

Considering the current tight spot market supply, if the current extremely low speculative positions (investor speculative activities) gradually return to normal, and the significant undervaluation of the one-month futures versus the 36-month futures spread for Brent crude oil is corrected, oil prices should rebound further. We expect the average price of Brent crude oil to reach $77 per barrel in the next quarter.

In response to this finding by Goldman Sachs, the financial blog Zerohedge commented that due to the unprecedented divergence between the futures market and the physical market, with healthy physical purchases, prices are artificially suppressed, and it could soon hit the terrifying "oil bottom" in Cushing, which could lead to a significant price increase, as suddenly there would be no available physical oil:

It can be imagined as a mirror image of what happened in April 2020, when an oil glut and inability to store caused prices to plummet.