The energy sector's on a tear. But $100 oil is not likely, says Goldman Sachs.

By Jamie Chisholm

Critical information for the U.S. trading day

U.S. stocks will start the week just a fraction off record highs. But it's not big tech that's been the winner of late.

The best performing sector over the last month is energy, with the Energy Select Sector SPDR ETF XLE up 13.7%, according to Jonathan Krinsky, technical strategist at BTIG.

He notes a number of companies, such as ConocoPhillips (COP), Occidental Petroleum (OXY) and Matador Resources (MTDR), whose share price charts signal topside breakouts are underway.

"[T]here is likely more upside for the group, as it just broke out of a two-year base with relative strength [versus the S&P 500] turning up. Perhaps it's becoming the new momentum?," says Krinsky.

Can energy's rally continue? Well, that may depend on oil price trajectory. And the latest call from Goldman Sachs is that sector hopes for crude to hit $100 a barrel are likely to be dashed.

The commodities research team at Goldman, led by Dann Struyven, gives three reasons why the Brent price may not reach a century.

But first they set out why oil prices have moved higher in recent weeks. "Brent has rallied to $91/bbl because the market is now pricing in a firmer demand outlook and some geopolitical downside risks to oil supply, which together have boosted positioning and valuation," says Goldman.

In particular, the International Energy Agency's forecast for 2024 oil demand has been moving up as traders switch from bearishness to a more optimistic stance, amid better manufacturing surveys of late in China, the U.S. and India.

Attacks on Russian refineries and heightened Israel-Iran tensions have raised the geopolitical risk premium, too.

The combination of expected heightened demand and supply fears have coincided with a rise in speculative positioning in crude oil, as the chart below shows.

But that leaves traders possibly badly positioned for a price stall. The first reason this may happen, says Goldman, is that their forecasts already assume global oil demand growth of 1.5 million barrels a day, which is above the IEA's expectations.

Second, Goldman says its "base case assumes no additional hits to supply from any geopolitical escalation."

And third, Goldman reckons that high levels of spare capacity in OPEC+ will encourage the cartel to raise production, with crude supply from the eight countries which announced a package of cuts in June and November last year increasing by 1.2 million barrels per day from July through to November in 2024.

"While still a close call, we assume that OPEC+ won't push oil prices to extreme levels because the 2022 energy crisis showed that extreme prices destroy long-term residual demand for OPEC barrels by boosting non-OPEC supply and boosting capex in alternatives to oil," says Goldman concludes.

The main trigger that would push oil away from Goldman's base case and above $100 a barrel center on geopolitics, particularly if Middle East tensions trigger a production response from OPEC+ or if Iranian supply is further disrupted.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) were a tad lower early Monday as benchmark Treasury yields BX:TMUBMUSD10Y hit fresh four-month highs. The dollar index DXY was up 0.1%, while oil prices (CL.1) dipped and gold traded around $2,336 an ounce.

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The buzz

U.S. economic data due on Monday include the Federal Reserve Bank of New York's survey of consumer inflation expectations, released at 11 a.m. Eastern.

The big economic catalyst of the week is likely to be the March consumer price inflation report published on Wednesday.

Chicago Fed President Austan Goolsbee takes part in a radio interview at 1 p.m. on Monday.

The first quarter corporate earnings season will kick into gear at the end of the week when JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and BlackRock (BLK) report numbers on Friday.

Tesla shares (TSLA) are up nearly 4% in premarket action after Elon Musk late last week said the company would unveil its Robotaxi in August. Meanwhile, Musk is embroiled in a spat over free speech in Brazil.

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The chart

It's fair to say that the start of 2024 saw investors taking a much more nuanced view of the market's big leaders. As Torsten Slok, chief economist at Apollo Group, says: "In 2023 it was all about the Magnificent Seven. Then it was the Fabulous Four. But now it is turning out that the story is actually a lot more complicated."

Top tickets

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   MSTR    MicroStrategy 
   TSM     Taiwan Semiconductor Manufacturing 
   GME     GameStop 
   NIO     Nio 
   AAPL    Apple 
   AMZN    Amazon.com 
   AMD     Advanced Micro Devices 
   OCGN    Ocugen 

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-Jamie Chisholm

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04-08-24 0634ET

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