Tuesday, November 1, 2016

Oil's Heading To $40 If OPEC Fails, Says Goldman

Lack of progress suggests declining probability of Nov. deal; Weakening fundamentals warrant lower prices without agreement.

November 1, 2016

An OPEC deal to cut oil output at a meeting this month is looking increasingly unlikely, with failure warranting prices in the low-$40s, according to Goldman Sachs Group Inc.

“The lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30,” Goldman analysts including Damien Courvalin wrote in a note dated Oct. 31.

The Organization of Petroleum Exporting Countries is due to meet in Vienna to implement the first supply cuts in eight years and get other producers from outside of the group to join in the action, including Russia. Brent crude extended losses below $50 a barrel on Monday after weekend talks failed to yield concrete details on an accord to reduce the global crude surplus and stabilize prices.

“The lack of an agreement so far has pushed oil prices sharply lower, with weakening oil fundamentals warranting oil prices in the low $40s a barrel in our view if OPEC is unable to deliver a convincing agreement,” the Goldman analysts wrote.

Even if the fear of slumping oil prices prompts the group to hammer out an accord, the probability of the deal successfully reducing inventories is low, the bank said. Rising October OPEC production and a faster ramp up of new non-OPEC projects have reduced the odds that an agreement translates into a decent draw in inventories during the first half of 2017, it said, estimating average OPEC output at about 34.2 million barrels a day last month.

While the probability of a cut being announced and the odds of it successfully reducing stockpiles have declined over the past week in Goldman’s view, OPEC’s most senior official said the organization and other major oil producers are “on course” to deliver a deal that will temper the global oversupply.

Committed Members

All of OPEC’s 14 members as well as erstwhile rivals such as Russia are committed to finalizing the agreement, Secretary-General Mohammed Barkindo said Monday in a Bloomberg Television interview. Even Iraq, which has demanded an exemption from supply caps and vowed to increase production, is willing to play its part, he said.

Brent for January settlement was up 30 cents at $48.91 a barrel on the London-based ICE Futures Europe exchange at 10:11 a.m. in Hong Kong. Front-month futures slid 2.8 percent on Monday.

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