EMEA News
Goldman Doubts OPEC Deal Efficacy Amid Mix Signals From Russia
The agreement may be ratified but its success may be fleeting: that's the conclusion drawn by Goldman Sachs Group Inc. with regards to the deal by Organization of the Petroleum Exporting Countries (OPEC) – who are currently seeking non-member participation – as it looks to limit its output to a range of 32.5 million to 33 million barrels per day (bpd).
Goldman analysts Damien Courvalin and Jeffrey Currie said in a note this week, "Recent comments by Saudi Arabia and Russia point to a greater probability of a production cut."
However, "We find that an agreement to cut production, while increasingly likely, remains premature given the high supply uncertainty in 2017 and would prove self-defeating if it were to target sustainably higher oil prices," the analysts state.
If a cut is enacted, which the majority analytical community doubts, oil prices may rise higher than Goldman's estimate of $45 a barrel in the first three months of 2017, followed by a drop lower than the bank's forecast of $60 in the fourth quarter as non-OPEC production reacts to the higher prices.
Courvalin and Currie write, "The momentum on this supply response would likely require a renewed cut in OPEC production in 2018, at which point the volume loss would more than offset the price recovery."
All but lost in the cap deal – except noted by the analysts – is the feasibility of rebalancing the market: they write, "higher production from Libya, Nigeria, and Iraq are reducing the odds of such a deal rebalancing the oil market in 2017."
While Goldman's overview of the likelihood and feasibility of the output cap is scholarly in tone, a more gut-level response was delivered by Matt Smith, commodity research director for Clipper Data; he told CNBC's The Rundown that "Until we get some actual physical barrels being taken off the market or we get some actual levels put in place, then it is just words and no action."
He added, "If there is going to be a production freeze or a production cut, it is Saudi Arabia that is going to do that heavy lifting."
Smith predicts oil prices will experience limited upside from current levels; Goldman believes if a deal is reached but its impact is offset by an increase in other sources of supply, U.S. crude will hold around $52.50 per barrel next year – but that no deal will send prices to $43 per barrel.
Even in the nebulous world of remarks and reaction but no formal policies, it's difficult to see how the cap deal will withstand Libyan, Iraqi, Nigerian, and Iranian production increases, or the fact that Igor Sechin, head of state-controlled Russian energy giant Rosneft, said on Monday his company will not cap oil production.
On the contrary, Sechin says Rosneft this year will raise its oil production, above the 4.1 million bpd it produced in 2015; he told reporters, "Try to answer this question yourself: would Iran, Saudi Arabia, or Venezuela cut their production?"
Sachin made these comments despite Alexander Novak, energy minister for Russia, taking president Vladimir Putin's lead and reiterating that his nation is prepared to join the OPEC freeze agreement.
On Monday, Putin told the World energy Congress that "In the current situation, we think that a freeze or even a cut in oil production is probably the only proper decision to preserve stability in the global energy market."
