Oil is forecast to hit $100

- Don't fear the yield curve # # --------------------------------------------------------------- The key takeaways today: - OPEC is expected to boost oil prices - Tech companies are gearing up for growth - The yield curve isn't signaling a recession - Banking experience fortified an entrepreneur - Brainteaser: How much did tech stocks fall after the internet bubble? Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- Forecast change: Oil to reach $100 per barrel Brent crude oil is expected to reach $100 per barrel in the next 12 months (up from an earlier forecast of $93 per barrel), according to Goldman Sachs Research. That's because reduced supply from OPEC and rising demand are expected to more than offset an increase in oil supply coming from the US. OPEC will probably be able to keep Brent prices in a range of $80-$105 next year, Goldman Sachs Head of Oil Research Daan Struyven writes in the team's report. - “Lower for longer” supply from Saudi Arabia and its OPEC+ partners is the main reason for the forecast change. Saudi Arabia's recent production announcement signals its “strong determination to drive down inventories and push up prices,” according to Goldman Sachs Research. - At the same time, there's scope for Saudi Arabia to boost profits in 2024 depending on which supply cuts are expended, as the increase in oil prices can compensate for the decline in Saudi production. - OPEC is likely to reduce its oil production for longer because of more supply coming from outside the organization — most notably from the US. Supply constraints for parts, rigs, and workers have eased in the US, and producers are drilling and completing wells more quickly with more powerful rigs with less downtime. - There will likely be more global demand for oil in 2024 led by Asia, as the slowdown in China's economy shows signs of “bottoming out.” India and the Middle East are also expected to have large increases in demand. - The rise in energy prices isn't expected to derail a soft economic landing for the US economy, according to Goldman Sachs Research. Most of the oil rally has probably taken place, measures of inflation expectations appear well anchored, and the Federal Reserve is focused on core inflation (which doesn't include energy). In addition, the hit to growth from oil in the US and Europe is expected to be moderate, and natural gas prices remain low. [Listen to more of Struyven's insights on this week's episode of Goldman Sachs Exchanges: The Markets.]( --------------------------------------------------------------- Tech companies are investing in growth After a period of cost cutting and layoffs — buoyed by generative AI tailwinds — software and internet companies are starting to invest for growth. There's “definitely a narrative shift to ‘now is the time to invest for growth in a responsible way,'” says Eric Sheridan, US internet analyst for Goldman Sachs Research, referring to the sentiment from 2,400 senior leaders across the technology, media, and telecommunication sectors who presented at Goldman Sachs' Communacopia + Technology Conference earlier this month. “You're going to see this mix of growth into next year that's married with rising margins but maybe not the outsized improvement in margins driven by efficiencies that we've seen over the last six to nine months,” [he says on an episode of Goldman Sachs Exchanges.]( New business activity in the software sector is also starting to stabilize, adds Kash Rangan, who covers the software industry for Goldman Sachs Research. If interest rates fall in 2024 — as many market participants expect — that will help lower the cost of capital, he says, and help “unfreeze the backlog of projects” put on hold. Meanwhile, more time and cloud computing power will be needed to bring generative AI's promised efficiencies to market, say Rangan and Sheridan. Software companies' generative AI products will only begin to ship starting in the fourth quarter of this year and into 2024, Rangan says. And consumers have yet to change their daily patterns based on the early generative AI tools available today. “We're still searching on the internet,” Sheridan says. “We're still opening mobile applications. We're still going to browsers,” he says, comparing the AI transition to the shift from desktop computing to mobile, which played out over a longer period than investors had expected. And while tech companies' stocks have already risen sharply, so have their earnings estimates since December 2022, Sheridan adds. In fact, multiples like price-to-earnings ratios have only risen a small amount, leaving room for some equities to climb higher. --------------------------------------------------------------- Why the yield curve isn't signaling recession The yield curve — the difference between yields of 10- and two-year US Treasuries — has long been seen as a recession predictor: When investors are fearful, they tend to buy up 10-year Treasuries, causing the yield to fall below the interest rate of shorter-term securities. [But that's not happening now.]( Longer-term Treasury yields have risen, as financial markets price in a lower chance of recession, says Ashok Varadhan, co-head of Global Banking & Markets at Goldman Sachs, in [The Markets podcast](. “Unbelievably resilient is the way I would characterize the US economy,” Varadhan says, noting that Goldman Sachs Research recently lowered its probability for a downturn. [When it comes to the yield curve, Varadhan says it's not so much that 10-year yields are low — they've climbed to around 4.5%. Rather it's that the Federal Reserve's policy rate is relatively high](. In an effort to tamp down inflation, the central bank has ratcheted up its target rate to 5.25%-5.5%. Bond investors, meanwhile, likely expect the central bank's policy rate to eventually go back to a more neutral, long-term rate of around 3.5% as inflation cools in the coming years. “People believe that will mean revert over time,” Varadhan says. “That's what's driving the inversion.” --------------------------------------------------------------- From commodity sales to haircare entrepreneur What does it take to build a global haircare products company when you're in your 20s, have a full-time job, and have never manufactured any type of product? “Internal resiliency,” [according to Briogeo founder Nancy Twine, who shared her story during a Talks at Goldman Sachs interview](. “That is such an important superpower. On the journey of entrepreneurism, so much of it is about learning and growing and being able to take those learnings and apply it to your business.” Goldman Sachs' Alison Mass and Briogeo's Nancy Twine The former commodity sales and trading vice president at Goldman Sachs launched her company in 2012, inspired by her late physician and chemist mother, who used to take her to their local health food store and bring home a variety of oils, extracts, and butters for formulating “very basic but functional beauty products.” Twine tapped her experience working at Goldman “learning how to just figure things out” and found a manufacturer that would let her conduct a very small run of her first products. She hired consultants to help with marketing and make sense of the retail landscape. Then she went to exhibit at the annual Cosmoprof beauty trade show in Las Vegas in search of retail partners. When a team from Sephora visited her booth on the last day, she didn't even know who they were because they flipped their name badges so as not to get hounded. Twine only got a first name for one of the reps and ultimately tracked her down on LinkedIn to secure a formal brand presentation at Sephora. That's how Briogeo became the first clean haircare product offered by the global cosmetics retailer, which now proudly depicts a clean seal on products to distinguish them in the marketplace. Twine also became the youngest Black woman to launch a product at Sephora. --------------------------------------------------------------- Briefings Brainteaser: Tech stock fizzle [While AI stocks don't appear to be in a bubble]( there are plenty of historical examples of equity prices soaring after a major tech innovation. During the internet bubble in the late 1990s, 13 major large-cap stocks increased in value by more than 1,000%, according to Goldman Sachs Research. For this week's quiz: From its peak in 2000 to its trough two years later, by roughly how much did the tech-heavy Nasdaq index of stocks fall? A) 60% B) 70% C) 80% D) 90% [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [Yahoo! Finance]( September 13 [How to allocate your portfolio during uncertain economic times (6:40)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. 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