Thursday, September 29, 2016

Goldman Sachs: OPEC Production Cut Deal Doesn’t Change Oil Price Forecasts Through 2017

By Leslie Shaffer
September 29, 2016

The OPEC deal to cut oil production may provide a short-term support for prices, but chances are it won't change the supply outlook much, Goldman Sachs said.

Goldman said in a note to investors that it was sticking with its forecasts for WTI at $43 a barrel for the end of this year and $53 a barrel in 2017. The investment bank had cut its year-end forecast this week from $50 a barrel.

"If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world," Goldman's analysts said.

Reuters and other media outlets reported from Algeria on Thursday that OPEC members had agreed to cut oil output for the first time since 2008. Reuters reported OPEC members would limit production to a range of 32.5 million to 33 million barrels per day, down slightly on August's output of 33.2 million barrels a day, but there were few details available on the deal.

Oil prices surged about 5 percent in response, with West Texas Intermediate trading at $46.75 per barrel. Without a deal, analysts had said oil could plunge to $40 or lower.

Goldman estimated the proposal would keep production on average at 480,000-980,000 barrels a day below the bank's forecasts through 2017.

"Strictly implemented in the first half of 2017 and all else constant, the production quotas announced today should be worth $7 a barrel to $10 a barrel to the oil price," the analysts said.

But they added, "Compliance to quotas is historically poor, especially when oil demand is not weak."

Goldman also noted that risks were "skewed to the upside" on production from countries not targeted by the quota deal, pointing out that output from Libya and Iraq was already 180,000 barrels a day above the bank's expectations.

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