Exhibit 98: Full-Year Average Global Crude Oil Supply and Demand
Oil consumption in 2017 could exceed supply for the first time since 2013.
Million Barrels/Day
100 Average Forecast
World Production
oS + World Consumption 98 Production Exceeded
Consumption wa
Between 2014 and 2016
96
¢
& World
94 Consumption Exceeded Production
Z @ Supply/Demand ¢ Forecasts Point to
Small Deficit in 2017 92
90 88 86
84 2005 2006 2007 2008 2008 2010 2011 2012 2013 2014 2015 201Ge 201/f
Data through December 31, 2016.
Source: Investment Strategy Group, Goldman Sachs Global Investment Research, International Energy Agency, OPEC, US Department of Energy, Energy Aspects, PIRA, Bloomberg, Barclays, JP Morgan.
Exhibit 99: Gold Prices and US 10-Year Real Interest Rates Gold prices and real interest rates are closely linked.
$/Ounce % 2,000 15
1,600 1,200
800
a i ou 2.0 * {
coo | MV t Gold Price 25 ¢ i!
d 2 = = 10-Year US Real Rate (Right, Inverted) 3.0
r 4
0 3.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Data through December 31, 2016. Source: Investment Strategy Group, Bloomberg.
very depressed despite the recent uptick in rigs, providing scope for further increases (see Exhibit 97). As a result, we expect shale production to recover in 2017, partially offsetting cuts elsewhere.
Despite these potentially destabilizing forces, we still think the oil market can swing to a small deficit this year. While lower input costs create upside risks to US shale production, these costs are highly correlated with oil itself. As a result, today’s $50 average breakeven level for shale is likely to move higher with oil prices, limiting the rebound in US production. Moreover, even if just half of the proposed production cuts are realized, our work suggests the oil market will still switch into a deficit this year. Finally, OPEC spare capacity has been largely exhausted by the production increases of the last year, while Iran’s production has now returned to pre-sanction levels. In turn, the risk of another disorderly market-share battle has declined significantly.
Against this backdrop, we expect oil supply growth to moderate and enable oil demand to again exceed oil production, creating the first deficit since 2013 (see Exhibit 98). With balance restored, we expect oil to trade in a $45-65 range in the year ahead. Thus we continue to recommend an overweight to US high yield energy bonds and US MLPs.
Gold: Still Searching for Its Luster
Gold was not immune from the reversal of fortune that befell interest rates last year, reminding us that their fates are fundamentally linked (see Exhibit 99). Put simply, higher interest rates raise the opportunity cost of holding gold, since the yellow metal generates no cash flow and must
be physically stored, often at a cost. A similarly inverse relationship exists with the US dollar, as investors often purchase gold as a hedge against the debasement of fiat currencies; gold has traded inversely to the dollar index 73% of the time on an annual basis over the last 40 years.
Given these relationships, we believe the key elements of our macroeconomic forecast—Federal Reserve tightening, rising interest rates, modest US dollar gains and average inflation—will represent headwinds for the yellow metal in 2017. Keep in mind that gold prices have declined in four of the last five Federal Reserve tightening cycles, with the only exception occurring during a period of dollar weakness in the mid-2000s. Based on these precedents, our expectation of two or three Federal Reserve rate increases in 2017 does not bode well for gold prices.
76 | Goldman Sachs | JANUARY 2017
HOUSE_OVERSIGHT_014609