Crude Up on Confidence of OPEC Cutback Compliance, But Russia Doubtful Of Long Term Efficacy

The Bank of Russia believes the oil production cutbacks won't have a lasting effect on prices.

After a disappointing week of losses, oil edged closer to new 17 month highs on Friday with West Texas Intermediate settling up $1 at $51.90 per barrel and Brent settling up $1.31 at $55.33, on the strength of Goldman Sachs making an about face and forecasting an 84 percent compliance with the Organization of the Petroleum Exporting Countries (OPEC) members and non-members cutback initiative.

Earlier this week, the bank expected compliance with the cutback targets to be low, with an average 1 million barrel per day impact on global oil production in the first half of 2017; it now believes, based on studying Saudi Arabia's fiscal balance, that the kingdom will be motivated to follow through in order to "achieve a normalization of inventories."

While Goldman's sudden change of heart and the market's Friday rebound may be a relief to cutback boosters, the bank of one of OPEC's strongest non-member supporters - in terms of public statements, at least - thinks the reductions will not do much to improve long-term prices.

In its Monetary Policy Report published Friday, the Bank of Russia stated, "Talks between OPEC member-states and major non-OPEC exporters to limit oil production are unlikely to have a lasting effect on the market situation."

The report went on to caution that, "any assertions regarding fundamental changes in the market should be very cautious so far," and that "factors underpinning the emergence of excess supply in the oil market are still in effect: these include the enhanced flexibility of oil supply (including from non- conventional sources), high oil inventories, and the slow growth of the global economy."

Absent in media coverage on Friday was the pointed criticism that has caused many players to wonder what will be the true outcome of the cutbacks, specifically: the fact that OPEC members are pumping in record volume in advance of their agreed-upon January starting date for the reductions.

This caused Nitesh Shah, commodities strategist with ETF Securities, to state in an email, "Communication from OPEC is confusing: we are somewhat skeptical that cartel and the non-cartel members will stick to their production targets, and the market may have over-priced the extent to which inventories will fall next year."