Goldman Lists Two Conditions For The OPEC Production Cut Extension To Work

Tyler Durden's picture

Goldman, which has been pushing for higher oil prices with seemingly daily bullish research reports for the past month, and which underwrote the last Saudi Arabian bond issue and is expected to also manage the Aramco IPO (explaining the bank's conflict of interest), released a note commeting on the latest development in the oil market, which sent the price of crude higher by 3% after Saudi and Russia oil minister agreed to extend the OPEC production cuts by another 9 months through the end of Q1 2018. Specifically, Goldman writes that "today’s announcement will likely further extend the oil price rebound started last week on decent stock draws and low positioning, although the rally so far today has remained modest compared to the move that occurred last year when the OPEC cuts were first announced."

Even so, Goldman's oil analyst Damien Courvalin had some caveats. Specifically, he said that for the strategy to work, however, two things have to take place:

  1. compliance needs to remain high and
  2. long-term oil prices need to remain low to prevent shale producers from ramping up investment significantly more. In fact, an extension of the cuts should go hand in hand with guidance of future production increases by low cost producers, in our view, with an already notable emphasis by Saudi and others that oil prices will likely remain in a $45-55/bbl long-term range, in line with our forecasts. This leaves us reiterating our 3Q17 $57/bbl Brent price forecast and, with an increasingly likely extension of the cuts, raises our confidence that the oil market will shift into backwardation in 3Q17.

His full note below:

Saudi and Russia commit to a 9-month extension of oil production cuts

Saudi Arabia and Russia announced today, May 15, that they had reached an agreement to extend their oil output cuts for another nine months, through Mar-18. This announcement comes ahead of the scheduled May 25 meeting of OPEC members. Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak further pledged in a joint statement "to do whatever it takes" to reduce global inventories to their five-year average. In our view, this commitment to a longer than expected cut by the two largest participants of the output deal significantly increases the likelihood that all participants will agree to such an extension, with the longer duration likely helping to achieve high compliance through 2017.

Today’s announcement will likely further extend the oil price rebound started last week on decent stock draws and low positioning, although the rally so far today has remained modest compared to the move that occurred last year when the OPEC cuts were first announced. Beyond the element of surprise from today’s announcement, and the need for broader ratification by other participants, we believe that such a moderate oil price response is consistent with the shift in focus that we noted in our Commodity Watch last week, with the market focus now squarely on near-term inventory draws and participants more cautious on pricing forward fundamentals.

This likely reflects the disappointment in the pace of stock draws (although, as we have argued, this is seasonal and backward looking), the continued skepticism on the level of compliance with the cuts (although shipping data confirm the high April compliance) and the recent increases in Libya and Nigeria production. Libya output is back above 800 kb/d, from 400 kb/d in April, with targets above 1.0 mb/d; in Nigeria, the Forcados pipeline came back online last week and the Qua Iboe pipeline is being tested currently, with both together allowing output to reach its pre-disruption level of 1.8 mb/d. While we remain cautious on factoring in such a recovery in production given the ongoing local tensions, these combined volumes could largely offset the benefit of the extended cuts, with Kazakhstan already announcing that it needs new terms as well. Once again, this leaves focus squarely on near-term fundamentals, which we believe will continue to show steady draws in OECD inventories in the short term.

We believe that today’s announcement is consistent with OPEC’s desire to achieve both price stability and backwardation, which will help to slow the recovery in shale oil production by curtailing the market's ability to grow future production through forward sales. For the strategy to work, however, we believe that (1) compliance needs to remain high and (2) long-term oil prices need to remain low to prevent shale producers from ramping up investment significantly more. In fact, an extension of the cuts should go hand in hand with guidance of future production increases by low cost producers, in our view, with an already notable emphasis by Saudi and others that oil prices will likely remain in a $45-55/bbl long-term range, in line with our forecasts. This leaves us reiterating our 3Q17 $57/bbl Brent price forecast and, with an increasingly likely extension of the cuts, raises our confidence that the oil market will shift into backwardation in 3Q17.

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NoWayJose's picture

Cut production but keep prices low? The only way that happens is a global depression!

Arnold's picture

Ready for my close up, Mr De Mille.
.
--Catt LeCall

Government needs you to pay taxes's picture

Classic bankster . . . fuck up a perfectly good demand curve with some cock-n-ball manipulation.  Hang 'em high . . . or drill 'em down,

Yen Cross's picture

 CL is also a fucking joke. Time to short it again.

  Million $ Bonehead is up early this morning.

spastic_colon's picture

condition #3 - just like all the other announcements, save the jawboning until it looks like markets need a stick save; and especially wait until a weekend when US markets are closed.

shovelhead's picture

Can we cut production enough the kill shale without killing ourselves?

Stay tuned.

The Wizard's picture

There is no manipulation of markets. I repeat, there is no manipulation of markets.

Tugg McFancy's picture

Heard Art Berman say the other day say he's seeing permian wells with a 80-85% water cut.

Let's see how long this shale miracle keeps on being a miracle.

Juggernaut x2's picture

oil touched $43 last Sunday night and the Fed bought oil futures up like crazy to stop more bloodshed

Yen Cross's picture

 Oil is way overbought, and demand is sinking.  Short CL, and I'm still short from higher. Oil is headed back into the high 30's handle.

GodHelpAmerica's picture

When have fundamentals mattered? What does the world look like with $30/oil. Hint: it's all connected. Oil will not collapse to that level in isolation--they won't allow it. You're going to need to see the CB's lose control first...

Also I'm reluctant to bet against commodities/energy here after they had a massive bear market and the dollar had an enormous rally....It seems to
me the risk is still strongly to the upside...Furthermore don't forget that rates are higher than they were 3 years ago--and the fed is hell-bent on raising-- so these marginal shale guys who need to take on high levels of debt to grow are going to have more difficulty expanding production when their best wells dry up...

Yen Cross's picture

  Charts still matter when it comes to commodites that people use daily.  Oil is coming back down, and this is just some short covering.

  Hey, you can play wiith the squid, and BTFATH, if you want.

GodHelpAmerica's picture

lol. Charts made by whom?

Are you short or just too cynical tosee the forest for the trees?

Commodities have been crushed as have precious metals. In real terms this is BFATL, fool.

Keep reading those charts painted by the squid et al, that are just another tool to herd the sheep.

spanish inquisition's picture

Translate - What we need is better fake compliance through creative bookkeeping. Showing that compliance is being met up and downstream to the end user thereby keeping oil prices elevated. And it allows for a quick turn around by backing in real numbers creating a perceived randomness when lower prices are needed to deter shale producers from starting up.

mily's picture

Is "(an)durand (an)durand" buying again?

Yen Cross's picture

 Compliance??? lol

  The squid is losing it's grip...

To Hell In A Handbasket's picture

Anything Goldman's is involved in, there is a scam somewhere in the process.

Arnold's picture

Never the less, when there is a Gartman Sachs post, I read it.
You know the Gomez Addams train wreck is coming, but you can't look away.

https://www.youtube.com/watch?v=HMxJtMoTnx8

Yen Cross's picture

  Gartman Sachs --lol

A. Boaty's picture

"...[D]o whatever it takes" to reduce global inventories to their five-year average..." That will happen when Turkey wins the EuroVision song contest.

Arrest Hillary's picture

Prolly cost more to shut 'em down .... than to keep 'em a pumpin' ?

medium giraffe's picture

Goldconflictman of Interestsachs says what, sorry?

 

silverer's picture

Goldman's pretty smart. That's like saying to not get killed falling off a 40 story building, you shouldn't climb to the top and jump. I'm wondering how the English language and written documents could have failed so badly. And I think I know the answer which is pretty frightening: The failure is in the worst place possible: in men's hearts. The moral and ethical structure in governments has broken down so badly, words and writing have lost their meaning. Lies are the order of the day, and this will certainly lead to a very dark place for the entire world.

Yen Cross's picture

 Hey, maybe I should buy the x4 Tommy Stolper inverse CL ETF?

Yen Cross's picture

  We both know Tommy reads Z/H.

medium giraffe's picture

Is his electric & gas still on?

Arnold's picture

I don't know what that is.
Put me down for 50 k.

gregga777's picture

Hmm, if the Saudis, the Organization of Petroleum Exporting Cheaters (OPEC) and (N)OPEC want to curtail US shale oil production they are certainly going about it the wrong way.  By reducing production OPEC and (N)OPEC place a floor under crude oil prices which serves to subsidize US shale oil.  Besides that, historically anytime that crude oil prices rise above ca. $20, in ca. 2014 constant dollars, the industrialized countries go into recessions.  

The industrialized nations have been in recession since ca. 2008 when TRUE inflation impact on GDP are accounted for.  The US government, the Goldman Sachs Feral Reserve System and the Mainstream FAKE NEWS Media have been LYING about cumulative inflation for at least a decade.  Today the TRUE inflation rate is at least 7%, meaning that the US economy has really been shrinking, not growing, for at least a decade.  

adr's picture

The production "cuts" worked. They "cut" production to record levels, higher than the levels where oil hit $26 and inventories have never dropped below the record 2015 level where oil prices were cut by almost 75% over the following six months. 

With production and inventory at record highs oil prices doubled. A near impossible feat in a real market. 

Any person in Econ class that writes increased supply with falling demand causes prices to rise, can't be called wrong anymore. 

shortonoil's picture

 

Refineries are the only market for crude, no one else has any use for it. At present yields they can not recover their raw material costs at the present market price. They are either taking huge losses, getting subsidized, or not buying their crude in the market place. The futures market probably doesn't mean very much at this point except to Goldman.

 

http://thehillsgroup.thehillsgroup.info/p/040217refinery-yieldsthe-et-mo...

veeger's picture

two of the top ten conditions for global world domination that gold man would like to see is the entire middle east ( except isreal ) up in flames , and #2 , isreal in control of all oil shipped out of the middle east. gold man and sacks control u.s. foreign policy , so those two events likely will try to be implemented as soon as possible.