The Goldman Sachs Group GS has lowered its forecast for oil prices, projecting a range of $70 to $85 per barrel for Brent crude in 2025, with an average price of $77. This adjustment reflects a growing caution in the market, driven by weaker-than-expected Chinese demand, higher U.S. shale production, and stable global inventories. As the energy sector braces for potential headwinds, Goldman’s outlook points to several key factors that could influence oil prices and the broader market in the years ahead.

While the outlook may appear cautious, the inherent volatility in oil prices could create opportunities for those prepared to navigate the market's twists and turns. The $75+ level, which Goldman Sachs has forecast as the commodity’s average realization next year, is still a healthy enough level for market participants. Therefore, investors interested in the sector could benefit from having quality stocks SM Energy Company SM, TechnipFMC plc FTI and Tullow Oil TUWOY.

Weaker Chinese Demand and Rising U.S. Production

A significant factor behind Goldman Sachs' revised forecast is the unexpectedly low demand growth from China, a major engine of global oil consumption. Structural changes in China, including the switch from oil to electricity in transportation and weaker petrochemical demand, have caused the bank to lower its global oil demand growth forecast for 2024 from 1.2 million barrels per day (bpd) to 0.9 million bpd. The subdued demand growth, coupled with high inventories that have not seen the expected drawdowns, has exerted downward pressure on oil prices.

Adding to the bearish sentiment, U.S. shale production has been more robust than anticipated, thanks to efficiency gains. U.S. crude production is now 200,000 barrels per day above Goldman Sachs' earlier estimates, contributing to an oversupply situation. The bank also anticipates that OPEC+ could opt to increase supply strategically, potentially to discipline non-OPEC producers like U.S. shale companies, which could further depress prices.

Supply Dynamics and Potential Surplus

Goldman Sachs suggests that oil markets may shift from a tight balance to a potential surplus by 2025. This expectation is rooted in the anticipated increase in supply from both OPEC and non-OPEC producers. OPEC+ is expected to begin unwinding its voluntary production cuts by the fourth quarter of 2024, which could lead to a market surplus. Goldman forecasts that if OPEC fully reverses its cuts, Brent crude could fall as low as $61 per barrel. This scenario would intensify competition among producers, potentially leading to lower prices to maintain market share.

Goldman Sachs Vs. Morgan Stanley

While both Goldman Sachs and Morgan Stanley foresee a downward trend in oil prices, there are subtle differences in their projections. Morgan Stanley also expects Brent crude prices to decline, forecasting a range of $75 to $78 per barrel by the end of 2025. Morgan Stanley predicts a transition from a tight market to equilibrium by late 2024, with a potential surplus emerging in 2025 due to increased supply from both OPEC and non-OPEC producers. However, Morgan Stanley's forecast is slightly more optimistic than Goldman Sachs', particularly regarding the pace and extent of the market rebalancing.

Goldman Sachs, on the other hand, is more conservative in its estimates, factoring in multiple downside scenarios. For instance, if demand from China remains flat, Brent could fall to $60 per barrel, a more drastic drop than Morgan Stanley’s estimates. This variance in outlook reflects different assumptions about the supply-demand balance, geopolitical risks, and the strategic actions of key producers like OPEC.

The Broader Implications for Investors

Goldman Sachs' revised outlook is a wake-up call for investors in the Oil/Energy sector. The combination of slower Chinese demand, rising U.S. shale production, and the potential for increased OPEC supply suggests a period of volatility and uncertainty ahead. However, this environment could also present opportunities. As oil prices adjust to new market dynamics, there may be openings to invest in energy stocks positioned to benefit from increased efficiency, technological advancements, or diversified portfolios that can weather periods of lower prices.

3 Energy Stocks to Buy

Goldman Sachs' latest take on the oil market underscores the complexities facing the energy sector. Investors should remain vigilant, watching for shifts in supply-demand dynamics, geopolitical developments, and strategic decisions by major producers.

Amid the uncertainty, it is necessary that investors adopt a cautious approach. It is prudent to opt for stocks that have enough room for upside. While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

We recommend accumulating stocks like SM Energy, TechnipFMC and Tullow Oil. SM Energy currently sports a Zacks Rank #1 (Strong Buy), while TechnipFMC and Tullow carry a Zacks Rank #2 (Buy) each.

You can see the complete list of today’s Zacks #1 Rank stocks here.

SM Energy Company: SM beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. The independent oil and gas exploration and production company has a trailing four-quarter earnings surprise of 11.9% on average.

SM is valued at around $5.2 billion. SM Energy has seen its shares increase 11.5% in a year.

TechnipFMC: The Zacks Consensus Estimate for 2024 earnings of Sunoco indicates 197.8% growth.

The leading oilfield equipment supplier is valued at around $11.4 billion. TechnipFMC has seen its stock surge 43.5% in a year.

Tullow Oil: TUWOY is valued at some $555.2 million. Over the past 30 days, the Zacks Consensus Estimate for 2024 earnings has increased 8.3%.

Tullow Oil enjoys a Value and Growth Score of A and B, respectively, each helping it round out with a VGM Score of A. This Africa-focused hydrocarbon producer and explorer’s shares have lost 13.5% in a year.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report

TechnipFMC plc (FTI) : Free Stock Analysis Report

SM Energy Company (SM) : Free Stock Analysis Report

Tullow Oil PLC (TUWOY) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research