With oil finally sliding on the realization that an OPEC production cut (or even freeze) deal looks increasingly improbable (albeit having allowed Saudi Arabia to raise $17.5 billion in a record international bond deal as WTI briefly probed the mid-$50 range), one bank has been warning about the downside risks to the commodity over the past month: back in September, Goldman Sachs explicitly warned that "Not Even An OPEC Deal Will Stop Oil Going Lower, Goldman Warns."
Overnight, Goldman's Damien Courvalin released another note that will make oil bulls nervous, in which he reiterated his base case that "growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30" and predicted that a "weakening oil fundamentals warrant oil prices in the low US$40s/bbl in our view if OPEC is unable to deliver a convincing agreement."
That said, when Goldman tells its clients to sell, it usually means its "flow" traders are accumulating a position so buyer, or rather seller, beware.
Here is Goldman's full note.
Lower probability of a cut, even lower odds of success
The OPEC consultation in Vienna last weekend was only a technical meeting, but the lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30. A unilateral cut from GCC producers would be unacceptable to them and the lack of an agreement so far has pushed oil prices sharply lower, with weakening oil fundamentals warranting oil prices in the low US$40s/bbl in our view if OPEC is unable to deliver a convincing agreement.
Even if the fear of such low prices leads OPEC to deliver an agreement on November 30, we reiterate our view that the odds of it succeeding are low. Further, we believe that rising OPEC production in October, from both disrupted and GCC producers, and a faster ramp up of new non-OPEC projects into year-end have further reduced the odds that an OPEC agreement translates into a decent draw in inventories in 1H17. Net, both the probability of a cut being announced and the odds of it successfully reducing inventories have declined over the past week, in our view.
OPEC roundup: (1) Saudi Arabia and its Gulf OPEC allies (Kuwait, UAE, Qatar) proposed last week to cut 4.0% from their peak output levels vs. a 1.4% seasonal decline between 3Q and 4Q-1Q over the past four years and our 2.0% decline forecast (given the preliminary October production increase, our forecast implies a 2.6% sequential cut in Nov-Mar). (2) Recent comments from Russia, Brazil, Kazakhstan suggest these countries are not yet willing to freeze output at current production levels. And (3) Iraq and Iran remain committed on being exempt from a production quota (with their production under-counted in their view in the secondary data used to measure compliance).
- At face value, these latest comments imply GCC output down 4% from September and the remaining OPEC members at our existing 2017 forecasts: Total 2017 OPEC production of 33.2 mb/d and a combined Russian and OPEC output of 44.4 mb/d (if frozen at estimate October output of 11.2 mb/d). This compares to our pre-Algeria announcement production forecasts of 33.8 mb/d and 45.2 mb/d, respectively.
- However, average October OPEC output is already up to 34.2 mb/d. As a result, a 4% cut from October output levels for the GCC producers and current Libya/Nigeria production (we estimate Nigeria production at 1.7 mb/d and Libya’s NOC puts production at 0.6 mb/d, 0.5 mb/d mom and 0.3 mb/d above our 2017 forecasts) would bring OPEC production to 33.6 mb/d. Given our base-case forecast for a rise in 2017 Russia production of 0.17 mb/d vs. October, this would bring combined OPEC and Russia production to 45.0 mb/d in 2017, just shy of our pre-Algiers forecasts.
- Finally, Libya/Nigeria/Iran/Iraq are targeting another 0.6 mb/d increase from current production. Further, Russia is ramping up production faster than we had expected, with our Russia oil equity analyst forecasting output of 11.7 mb/d in 2017 vs. our base case of 11.4 mb/d. As a result, at a 4% cut from October production level for core 4 Gulf producers, the targeted production from the “disrupted 4” and at our analysts’ higher Russia forecast, aggregate OPEC and Russia would reach 45.9 mb/d, 0.7 mb/d above our 2017 base case.