Oil: Waiting for the cuts – Goldman Sachs

The oil market has digested the OPEC and non-OPEC cut announcements and focus is shifting to the current lackluster fundamentals with higher OPEC and FSU supply offsetting strong demand growth notes analysts at Goldman Sachs.

Key Quotes

“We expect that the potential ramp up in Libya and a stronger dollar will likely further limit the near-term upside to prices and our December WTI price forecast remains $50/bbl. There will be little evidence of production cuts until mid to late January which we believe will be the next catalyst for the next large move in prices, which in our view will be higher to $55/bbl.”

“A potential 350 kb/d increase in Libya production represents a downside risk to this $55/bbl WTI forecast but its uncertain timing, lingering local opposition and the ongoing political instability in the country lead us to maintain our 600 kb/d production forecast for now. Ultimately, our work on Saudi Arabia’s fiscal balance suggests that the kingdom has a strong incentive to cut production to achieve a normalization of inventories, even if it requires a larger unilateral cut, consistent with comments last weekend by the energy minister. Given this incentive to cut and in light of the OPEC and non-OPEC cuts announced over the past two weeks, we are slightly raising the 1H17 production declines that we project from the participating producers. We expect 84% compliance to the 1 .6 mb/d country level announced cuts (which are lower than the 1 .8 mb/d headline cuts) from October 2016 IEA crude production levels.”

“These greater projected cuts and our strong demand growth forecast lead us to forecast a normalization in inventories and backwardation across the forward curve by next summer. For WTI and Brent spot prices to materially rise above current forwards, we believe that OECD stocks will need to visibly and meaningfully draw down and we expect this to occur in 2Q17 . As a result, we are raising our 2Q17 WTI price forecast to $57 .5/bbl from $55/bbl previously ($59/bbl Brent). Beyond 1H17 , we expect that the global market will remain balanced, with Brent prices between $55/bbl and $60/bbl, on higher production from low-cost producers, a greater shale supply response and the continued ramp up in legacy projects. As a result, we are smoothing out our medium-term price forecast, with our 2H17 and 2018 Brent forecast now $58/bbl ($55/bbl for WTI) from $51 .5/bbl and $63/bbl previously.”