Goldman, which has been pushing for higher oil prices with seemingly daily bullish research reports for the past month, and which underwrote the last Saudi Arabian bond issue and is expected to also manage the Aramco IPO (explaining the bank’s conflict of interest), released a note commeting on the latest development in the oil market, which sent the price of crude higher by 3% after Saudi and Russia oil minister agreed to extend the OPEC production cuts by another 9 months through the end of Q1 2018. Specifically, Goldman writes that “today’s announcement will likely further extend the oil price rebound started last week on decent stock draws and low positioning, although the rally so far today has remained modest compared to the move that occurred last year when the OPEC cuts were first announced.”
Even so, Goldman’s oil analyst Damien Courvalin had some caveats. Specifically, he said that for the strategy to work, however, two things have to take place:
compliance needs to remain high and long-term oil prices need to remain low to prevent shale producers from ramping up investment significantly more. In fact, an extension of the cuts should go hand in hand with guidance of future production increases by low cost producers, in our view, with an already notable emphasis by Saudi and others that oil prices will likely remain in a $45-55/bbl long-term range, in line with our forecasts. This leaves us reiterating our 3Q17 $57/bbl Brent price forecast and, with an increasingly likely extension of the cuts, raises our confidence that the oil market will shift into backwardation in 3Q17. His full note below:
Saudi and Russia commit to a 9-month extension of oil production cuts
Saudi Arabia and Russia announced today, May 15, that they had reached an agreement to extend their oil output cuts for another nine months, through Mar-18. This announcement comes ahead of the scheduled May 25 meeting of OPEC members. Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak further pledged in a joint statement “to do whatever it takes” to reduce global inventories to their five-year average. In our view, this commitment to a longer than expected cut by the two largest participants of the output deal significantly increases the likelihood that all participants will agree to such an extension, with the longer duration likely helping to achieve high compliance through 2017.
This post was published at Zero Hedge on May 15, 2017.