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What's going on?

According to a report released over the weekend, Goldman Sachs thinks the oil price is going to get a substantial top-up sooner than it previously thought.

What does this mean?

Demand for oil has finally started rebounding from last year’s pandemic-driven lows, with the dusky nectar’s price gaining more than 20% this year. But Goldman thinks that rally’s only just beginning: the firm says the oil price will rise another 20% by the third quarter of the year (tweet this).

There are a couple of reasons why. First, Goldman thinks demand will be back to pre-pandemic levels by late July, with the vaccine rollout driving economic activity higher. And second, it reckons supply will keep lagging: oil producers are, after all, showing no signs of significantly ramping up production in the next two quarters.

Why should I care?

Zooming out: Commodities are a good way to protect against inflation. 

Between the mooted economic recovery and uptick in government spending, investors are starting to feel more confident that the prices of the world’s goods and services will rise (i.e. inflation). And as the prices of goods and services increase, so will the prices of the raw materials used to produce them. That’s why commodities are seen as a good “hedge” against inflation – another thing that could, according to Goldman, drive oil’s price higher.

Zooming in: The big freeze in Texas isn’t too big a deal for oil. 

The unprecedented cold snap in Texas – America’s biggest energy-producing State – has been moving the oil price lately too. The slippery elixir’s price initially rallied on worries that production would stall and supply would falter, only for that rally to sputter out after investors realized Texan refineries – which would take time to resume operations – would cause a drop in demand. Still, Goldman reckons the effect on supply and demand should balance each other out, and the impact on the global oil market should actually be pretty small.

Originally posted as part of the Finimize daily email.

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