Expectations of an extension of an oil production cut agreement by the Organization of the Petroleum Exporting Countries and major producers led by Russia are supporting prices, but there are risks for a renewed surplus later next year, Goldman Sachs analysts wrote in a report published on Monday.
A nine-month extension would normalize OECD inventories by early 2018, in our view, but we see risks for a renewed surplus later next year if OPEC and Russia’s production rises to their expanding capacity and shale grows at an unbridled rate,"the Goldman analysts said.
To avoid the boom-bust cycle, sustained backwardation in prices will help, the Goldman analysts added. This is as the low deferred prices will restrain access to credit for shale producers. Backwardation happens when spot and near-month contracts are priced higher than contracts in the forward months. Costs will also play a role in setting shale’s growth path but we do not forecast sufficient inflation at this point to achieve the required slowdown next year, the investment bank said.
In the current environment, Goldman believes that the largest imbalance is the potential for a large surplus in 2018, leaving low deferred prices to resolve this credible threat. Low-cost producers selling their output in the spot market should further be incentivized to reduce inventories, to generate the backwardation linking spot oil prices near current levels and low deferred oil prices.
Crude oil prices have been gaining steadily in the last few weeks but are slightly lower in Asia on Tuesday with U.S. West Texas intermediate and European Brent futures down 0.4 percent lower around $51 and $53.60 a barrel respectively, as prices give up some recent gains after President Donald Trump proposed the sale of half the country’s strategic oil reserves in his budget plan. Goldman is keeping its Brent spot price of $57 a barrel for the second half of 2017.Oil remains in the uptrend in anticpation of the OPEC’s meeting. Its outcome will be crucial for the commodity. source: xStation5