Goldman: Oil in the High $50s All the Way to 2019

Goldman now believes compliance of the oil production cutback deal will be strong.

In a week that has seen bold predictions about how high or low oil prices will go depending on how the Organization of the Petroleum Exporting Countries (OPEC) undertakes its output reduction next year, Goldman Sachs on Friday took a cautiously optimistic approach by upping its price outlook for the second quarter of 2017: from $55 to $57.50 per barrel for West Texas Intermediate, and from $56.5 to $59 per barrel for Brent.

But increased output from Libya combined with a stronger U.S. dollar compelled the bank to maintain its December outlook at $50, prior to what it calls the "next catalyst for the next large move in prices," meaning the January starting date for OPEC to begin cutting 1.6 million barrels per day (bpd) from total output.

As for the longer term, Goldman cut its price forecasts for 2018 on expectations that cost deflation, productivity gains, and upstream investment will pick up in 2017 as the price stabilizes around $55-$60 per barrel; and in 2019, the bank believes Brent will hover at $58 per barrel, compared previous estimates of $63, a level at which it is "increasingly comfortable that the global market can remain balanced at."

Surprisingly, considering its recent statements, Goldman analysts forecast an 84 percent compliance to the cuts: "Ultimately, our work on Saudi Arabia's fiscal balance suggests that the kingdom has a strong incentive to cut production to achieve a normalization of inventories, even if it requires a larger unilateral cut, consistent with comments last weekend by the energy minister.

"Given this incentive to cut and in light of the OPEC and non-OPEC cuts announced over the past two weeks, we are slightly raising the 1H17 production declines that we project from the participating producers."

The analysts added, "Beyond H1 2017, we expect that the global market will remain balanced, with Brent prices between $55 per barrel and $60 per barrel, on higher production from low-cost producers, a greater shale supply response, and the continued ramp up in legacy projects."

With Goldman's Brent forecast for 2018 and 2019 now standing at $56.3/bbl and $58/bbl respectively, it would suggest sub $350/mt HFO bunker prices in the primary ports until the end of the decade, according to Ship & Bunker data.

The outlook is in sharp contrast to statements it made just five days prior, when it expected cutback compliance to be low with an average 1 million bpd impact on global production in the first half of 2017.

The forecast also diverges from analysis conducted by Bank of America and Barclays, which are worried about compliance as well as a rebound in U.S. shale production, and therefore have maintained their oil price forecasts.

However, Goldman's views fall roughly in line with those of Barry Dawes, executive chairman of Martin Place Securities Pty Ltd.: earlier this week he told CNBC that he believes compliance will be strong at least for the first three months of the New Year, and that "we might actually find an average price closer to $60 than $50."