Wall Street Reacts To The OPEC/NOPEC Deal: "Saudis Are Wrong To Think US Shale Won't Respond"

With oil prices surging to 17-month highs following this weekend's OPEC-NOPEC deal and Saudi promises to cut still more, many Wall Street analysts are skpetical with Goldman Sachs warning that the Saudis are wrong to think U.S. shale production won’t respond to higher prices. However, Nomura and Bernstein see little threat to OPEC from rising U.S. shale production in 2017.


Prices spiked...


As The Saudis enabled yet another major short-squeeze... (Money managers slashed short bets on lower West Texas Intermediate crude prices by the most in five years after OPEC’s Nov. 30 accord to reduce supply.)

But here is what Wall Street thinks... (via Bloomberg)

Goldman Sachs

  • Saudi Arabia is wrong to think that U.S. shale production won’t respond to higher oil prices in 2017
  • While crude may rise to over $60/bbl if OPEC members, other nations cut production as promised, a rebound in U.S. shale output would bring prices back to $55, the bank’s forecast for the first half of next year

Nomura head of Asia oil and gas research Gordon Kwan

  • OPEC only needs 50% compliance for oil above $60 in 2017
  • Bank maintains $60/bbl Brent forecast for 2017, with upside risks, following non-OPEC decision to curb supply
  • Prices need to be sustained at $70-$80 for shale output surge to “broaden” to ~6m b/d
  • “It will be late 2018 before the U.S. could pose a threat to OPEC”

Bernstein analysts including Neil Beveridge

  • Oil at $60/bbl seen as a realistic target for 2017, and $70 for 2018 after OPEC, non-OPEC deal
  • Bank expects at least 70% compliance with Saudi Arabia, Gulf States and Russia representing 1.1m b/d of agreed cuts
  • Markets seen shifting from surplus to deficit once cuts are implemented at the start of 2017
  • 800k b/d deficit expected in 1H 2017, widening to over 1.5m b/d if cuts continue into 2H
  • U.S. production not expected to increase by more than 500k b/d from current levels as long as prices stay near $60/bbl

JBC Energy

  • “We have our doubts and do not really see OPEC being able to keep prices above the market equilibrium level”
  • Flattening forward curve could bring barrels out of storage, depressing physical prices as “distressed cargoes” are sold
  • At least half non-OPEC nations involved in deal were already expecting supply to fall in 2017. Actual additional cut on top of OPEC is “something in the region of 130k b/d”

Wood MacKenzie research director Asia Pacific refining & chemicals Sushant Gupta

  • Prices would avg as high as $70 in 2017 if OPEC, other nations stick to plans to cut about 1.8m b/d of oil production
  • Heavy crude demand expected to rise in 2017 as more Asian facilities are upgraded, new refineries come online
  • “Even without accounting for OPEC production cuts, we see a shortage of heavy crude oil in 2017”
  • Rise in official selling price will be more prominent for heavier grades with narrowing of light-heavy price differentials

Barclays analysts including Michael Cohen

  • There are too many moving parts for OPEC’s new policy to be sustainable in long term; strategy bound to “overshoot”, leading to lower prices in 2H 2017
  • Output cuts “are not likely to be as significant as stated”
  • Bank’s base case fcasts OPEC output drop of 700k b/d in 1Q 2017 vs 4Q 2016, fall only 300k b/d further from 1Q to 2Q
  • Non-OPEC nations likely to meet their commitment to curb output by methods market would have priced in anyway
  • U.S. output to grow 360k b/d by 4Q 2017 vs previous year
  • Bank reiterates oil price to average mid-$50s in 1Q, move to $60 range in 2Q

Morgan Stanley analysts including Adam Longson

  • Agreement by non-OPEC countries to cut output seen bullish for markets but higher production from Libya, Nigeria remain “key risks” to OPEC’s rebalancing plan
  • Bank provides detailed breakdown of output cuts pledged by non-OPEC countries totaling 558k b/d, including some natural declines accepted by OPEC as output cuts
  • Cuts due to natural decline, drop in output from smaller producers is hard to implement or monitor
  • Agreement doesn’t account for growth at other major producers such as U.S., Canada, Brazil, Norway
  • Russia, Oman’s role in monitoring committee could increase probability of compliance
  • Russia does not expect full compliance before April-May


  • Oil price optimism is subdued as upside largely priced- in, deal will be implemented gradually and elevated storage levels to be drawn, mitigating reduced global supply
  • BMI maintains Brent price fcast at $55/bbl in 2017


  • OPEC action supports bank’s fcast for Brent to avg $61/bbl next year

Bloomberg oil strategist Julian Lee

  • Venezuelan President Nicolas Maduro has called for an OPEC summit to “establish a new mechanism in setting oil prices.” He will run up against the same issues faced by his predecessors
  • OPEC can fix the price at which its members sell their oil, or the volume sold. It cannot fix both at the same time
  • OPEC’s biggest problem may be anticipating how much of its oil the world needs, not controlling the actions of its members
  • Long lead times in getting oil to major markets, turning it into required products means the group has to forecast demand for its oil at least 6 months ahead
  • If it cannot do that, no amount of trying to control supply will bring price stability

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And if the lagged rig count resurgence is anything to go by, US crude production is set to ramp even further...


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