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Goldman Sachs is finally convinced that OPEC’s oil production cuts will come into effect, and begin to bite early next year. With demand also expected to grow, the bank raised its WTI price forecast for the first half of 2017 to $55/bbl, compared to earlier forecasts of $45/bbl for the first quarter, and $50 for the subsequent although caveat emptor see Goldman Forecast: From $200 To $20 In Just A Few Years
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“For the purpose of our oil price forecast, our base case now is that an OPEC production cut will be announced and implemented. As we have flagged previously, this leads us to reverse the direction of our 2017 oil price path, although not the annual average level, which remains at $52.5/bbl for WTI and $54/bbl for Brent (slightly lower given a tighter expected differential).”
The average level is maintained because Goldman cut price forecasts for the second half of 2017 to $50/bbl (from $55/bbl and $60/bbl) on expected resumption in OPEC production growth, higher U.S. shale supply and a further strengthening of the U.S. dollar.
In September when the OPEC cuts, the first since 2008, were announced, Goldman was “skeptical,” and retained its 2017 oil price forecasts at $53 per barrel. It still said the deal’s implementation – cutting output by up to 1 million barrels a day to a range of 32.5-33.0mb per day – could add $7 to $10 to oil prices in the first half of 2017.
The bank expects the OPEC to produce 33.0 mb/d in the first half of 2017 and Russia to freeze output at 11.6 mb/d.
Reasons Why Goldman Is Bullish On Oil
Goldman cited three reasons for its new position on OPEC intentions. One, oil exporters are near capacity levels after the production ramp-up in October; two, it revised global balance in the second half of 2017, owing to stronger-than-expected demand growth; and three, “more evidence” that a price level of $55/bbl is required for high-cost producers to resume operations.
Oil price volatility is also expected to reduce on normalization of inventories, and a pick-up in hedging flows and a better assessment of the industry’s cost curve. This is particularly so for longer-dated tenors, according to Goldman.
“We believe that such a (production) cut will likely generate backwardation – helping them grow market share by sidelining higher cost producers – as well as reduce oil price volatility – which should increase the valuation of the debt and equity they are issuing. In our view, the goal of normalizing inventories should, however, not target elevated oil prices as the flattening of the oil cost curve and the unprecedented velocity of the shale supply response would make such an endeavor rapidly self-defeating above $55/bbl.”
Political risks still abound, especially perhaps with the return of Iran into the oil mix. Still, Goldman expects Saudi Arabia, Kuwait, Qatar and the U.A.E., to deliver the cuts with the rest of OPEC maintaining output. Any disagreement in the OPEC is near-term bearish even from current levels, Goldman cautioned.
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