Oil prices may break above $60 a barrel if OPEC and Russia fully adhere to their promises to pump less, says Goldman Sachs Group Inc.
West Texas Intermediate could rise by $6 above the bank’s current forecast of $55 a barrel and $56.50 for Brent in the first half of 2017, Goldman Sachs said in a Nov. 30 note. That’s if the organization complies as promised with a new production target of 32.7 million barrels a day, coupled with 350,000 barrels a day in cuts from non-OPEC members Russia and Oman.
Banks from Goldman to UBS Group AG are turning more bullish on oil after the Organization of the Petroleum Exporting Countries’ first agreement to reduce output in eight years. The group’s deal to curb production by 1.2 million barrels a day was broader than expected, with Russia nodding to unprecedented cuts. Morgan Stanley predicts the market to rebalance in the first half of 2017.
“Focus will now shift to implementation,” with the deal agreed to in principle and country level quotas established, analysts including Damien Courvalin and Jeffrey Currie said in the note. “The catalysts for a further rally in prices will need to come from confirmation of participation by non-OPEC producers, evidence of compliance by OPEC producers and more clarity on what Iran has agreed to do.”
The bank’s main forecast is based on OPEC cutting oil production to 33 million barrels a day, reflective of a 73 percent compliance to Wednesday’s target. Also prices above $55 are not sustainable should U.S. shale producers ramp up output as well as if there is greater brownfield spending elsewhere, Goldman said. Oil at that level would lead to a “sizeable shale response,” adding 800,000 barrels a day in 2017 versus oil at $45, the bank said, reiterating its WTI crude forecast of $50 for the second half of next year.
Brent, the benchmark for more than half of the world’s oil, surged by the most since February on Wednesday after the OPEC agreement in Vienna. Futures for February settlement rose 1.2 percent to $52.48 a barrel on the London-based ICE Futures Europe exchange at 3:47 p.m. Singapore time. WTI for January delivery was at $50.02, up 58 cents, on the New York Mercantile Exchange.
OPEC’s deal achieves a broad consensus with Libya, Nigeria and Indonesia exempt, a modest growth allowance for Iran based on secondary sources, and a 4.6 percent cut across other producers, according to Goldman. While the group plans to hold talks with non-0PEC producers next week in Doha, OPEC will meet again on May 25 next year, at which point it intends to extend the cuts by another six months.
Other banks are also cautiously optimistic. The cuts will likely trigger inventory draws in the first half of 2017, according to UBS, while Morgan Stanley says the energy industry is likely to see another wave of “notable” investments within the U.S. as well as in other regions.
If OPEC loses discipline, the market could be set up for disappointment in the second half of 2017 as investments could be limited later in the cycle, according to Morgan Stanley.