Oil prices could once again soar to $125 a barrel in 2023 if China ends its COVID-19 lockdown policy, Goldman Sachs says

• Oil prices could once again soar to $125 per barrel if lockdown policies in China come to an end, according to Goldman Sachs.
• The bank sees Brent crude prices rising to at least $110 per barrel next year as supply risks remain.
• "Our China economists believe recent headlines simply mark the start of a multi-month preparation period for reopening," Goldman said.

Oil prices could be headed significantly higher in 2023, especially if China shifts away from its COVID-19 lockdown policies and towards a full reopening, according to Goldman Sachs.

In a Monday note, the bank highlighted that its 2023 forecast for Brent crude oil to trade at $110 per barrel has plenty of upside risk to $125 per barrel due to a consistent decline in inventories and spare capacity. On top of that, there is a risk "of meaningful supply disruptions" in Libya, Russia, Iraq, and Iran, which could send oil prices higher.

"The risk distributions around our current oil forecasts are skewed squarely higher given spot demand continues to realize robustly," Goldman Sachs' Callum Bruce wrote.

Brent crude oil currently trades just below $100 per barrel, and it topped out at nearly $140 per barrel shortly after Russia invaded Ukraine.

There are still plenty of concerns about demand for oil as China continues with its COVID-19 related lockdown policies. Those policies, if they continue, represent the "final significant fundamental downside risk" for oil prices, according to the note.

But recent headlines have hinted that China may be leaning away from their lockdown policies.

"Our China economists believe recent headlines simply mark the start of a multi-month preparation period for reopening, and so have maintained their current base case of 2Q23 reopening, once the winter flu season has passed," Bruce said.

Any further news that China is moving towards a reopening would likely drive upside in oil prices. An early reopening would add $6 to Goldman's $110 per barrel price target, and a full international reopening would add $15 to Goldman's price target to get it to $125 per barrel.

Such a move in Brent crude oil prices would represent potential upside of 29% from current levels.

Finally, a weakening of the US dollar, which is likely if China fully reopens its economy, could boost oil prices as its year-to-date strength has served as a headwind for commodity prices.