Goldman Sachs Turns Bullish On Oil

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Goldman Sachs is known to make outlandish calls on crude oil. First came a forecast of $200 a barrel back in March 2008, which fell flat on its face within months. The second was a call of $20 a barrel made in September 2015: To be fair, though crude did not actually make it to this catastrophic low, it did come down to $27 a barrel. It was close.

Now, in a recent report, analysts including Damien Courvalin at Goldman have turned “tactically bullish,” forecasting $55 a barrel for the first half of 2017, up from their earlier forecast of a range-bound market between $45 and $50 a barrel for that period.

However, they have not upgraded their annual average of $52.5 a barrel for next year. While the first half’s forecast for 2017 has been upgraded, the forecast for the second half of next year has been downgraded from $55-$60 a barrel to $50 a barrel, as the bank expects OPEC to resume production and U.S. shale oil supply to increase.

(Click to enlarge)

Even without the OPEC production cut, Goldman sees the second half of next year tip over to a deficit. Hence, the bank believes that a production cut by OPEC will not hurt them for more than six months, as they can return to their normal production by the second half of next year.

“With greater confidence that the global oil market can finally shift into deficit later next year, we now believe that there is a strong rationale for low-cost producers to deliver a swift production cut to normalize inventories,” the analysts said, as cited by Bloomberg.

Let’s examine the possibility of a deal on November 30 and the likely effect on oil prices.

The future of oil prices, at least in the short-term, hinges on the OPEC meeting in Algiers.

Related: The Economy Needs Higher Oil Prices – Goldman Sachs

The initial signs point to an all-out effort by OPEC to secure a deal. Initially, though, both Iran and Iraq had objections to the 4-4.5 percent across-the-board production cut proposed by Algeria for all members, barring Libya and Nigeria. Nevertheless, the cartel has been able to convince Iraq to go ahead with a cut of some magnitude—potentially the 4 to 4.5 percent cut.

«At the end of the day, we are probably going to get about a million barrels a day of cuts from OPEC and that’s going to drive the market into deficit,» Bart Melek, the head of commodity strategy at TD Securities in Toronto. »We are seeing communications from Iraq that they would be happy to participate,» reports The Business Times.

That only leaves Iran, which is still not on board with the formula.

On the production front, Iran has reached 4 million barrels a day. Previously, Iran had said it would come to the table for talks only after reaching its pre-sanction level of production.

However, the new President-elect in the U.S. had promised to “tear up” the nuclear agreement with Iran during his campaign. And while the Iranians are not acknowledging the threat to the deal, the uncertainty is palpable.

«There’s just no way the Iranians are going to agree to this,» Again Capital’s John Kilduff told CNBC. «I think they see a horizon, potentially, where their oil production and exports get disrupted again by the new Trump administration … so why would they agree to any sort of cut at all right now?»

Related: Obama’s Last Regulations To Impact Oil, Gas And Mining

Among the non-OPEC nations, Russia has agreed to freeze production, but is not willing to cut production. Russia is attempting to convince OPEC that even a freeze by Russia is equivalent to a production cut, because Russia had planned to increase production in 2017.

“While there’s actually nothing new from Russia today, Moscow is changing its rhetoric to show its commitment to a deal,” said Alexander Kornilov, an analyst at Aton LLC in Moscow. “The new wording shows Russia is trying to convince OPEC partners,” reports Bloomberg.

OPEC will announce a deal (or no deal) at the end of the meeting on November 30, which should give a small pop to oil prices if favorable. The markets, however, will be keen to look at the numbers in the subsequent months to analyze whether the OPEC members and Russia adhere to their production quotas or whether there is blatant cheating.

Though a pop above $52 a barrel in WTI is not inconceivable, sustenance and a huge rally is unlikely, regardless of a cut.

By Rakesh Upadhyay for Oilprice.com

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