Goldman Sees Oil Lower For Longer After Getting A Bump From Cuts

By Bloomberg, BOE Report |

Oil prices boosted by global output reductions will be capped because of new supply before long, according to Goldman Sachs Group Inc.

The cuts by OPEC members and nations outside the group, as well as strong demand growth, will probably help curb inventories by next summer, analysts including Damien Courvalin said in a note dated Dec. 16. While the bank raised its oil-price forecasts for the second quarter of 2017, it decreased its crude estimates for 2018 on concern that new production will enter the market.

Brent crude, the benchmark for more than half of the world’s oil, has surged since the Organization of Petroleum Exporting Countries agreed Nov. 30 to trim output for the first time in eight years. A broader deal reached later in Vienna between the group and 11 non-OPEC producers including Russia encompasses countries that produce about 60 percent of the world’s crude. Still, the increase in prices could prompt a revival in production in other areas, including U.S. shale fields.

“The low-cost producer response to drill for more oil will likely limit the rebound in costs for the rest of the industry, as activity will rise in the most productive areas with the largest oil reserves, extending the oil service spare capacity,” the Goldman analysts wrote in the report.

Gains for Now

For now, though, Goldman sees chances of crude extending its gains. The bank raised its price forecast for West Texas Intermediate, the U.S. benchmark, to $57.50 a barrel from $55 for the second quarter of 2017. The estimate for Brent was increased to $59 a barrel from $56.50 for the same period.

WTI crude traded at $51 a barrel on the New York Mercantile Exchange by 5:06 p.m. Singapore time. Brent in London was at $54.22 a barrel. The potential ramp-up of Libyan oil production and poor compliance to the output deal may limit price gains, according to Goldman. A stronger U.S. dollar is another risk, the bank said.

There will be “little evidence” of production cuts until mid-to-late January, which is likely to be the catalyst for the next large move in prices, according to Goldman. Oil will rise higher to $55 a barrel in that scenario, it said. The bank expects 84 percent compliance to the 1.6 million barrels a day in announced reductions from the October production levels released by the International Energy Agency.

Goldman estimates OPEC members, excluding Indonesia, will reduce supplies by 974,000 barrels a day in 2017. For non-OPEC producers, 388,000 barrels a day of reductions are expected, according to the report. Average demand growth is forecast to reach 1.55 million barrels a day this year, while it is predicted to increase by 1.5 million barrels a day in 2017, Goldman said.

Balanced Market

Beyond the first half of 2017, Goldman said it expects that “the global market will remain balanced, with Brent prices between $55 a barrel and $60 a barrel, on higher production from low-cost producers, a greater shale supply response and the continued ramp up in legacy projects.” It reduced its 2018 average price forecast for Brent to $58 a barrel from $63.

U.S. producers will be able to achieve 800,000 barrels a day of annual output growth as WTI crude stabilizes at $55 a barrel, Goldman said. New projects are also estimated to come online in 2017 and 2018, it said, reducing its WTI average price forecast for 2018 to $55 from $60.