OPEC Deal “Short-Term” Cut, Goldman Says

Were you holding your breath to find out what Goldman thinks about the prospects for crude prices in the wake of the non-OPEC cuts and the Saudi’s contention that they’re prepared to cut production below the 10.06 m/bd target established on November 30?

No? Well too bad, because you’re going to get the bank’s take here:

In Vienna on December 10, eleven non-OPEC producers agreed to join 11 OPEC members to reduce production in 1H17. While the announced cuts were smaller than expected and their implementation remains uncertain, the agreement is nonetheless noteworthy as it lifts the uncertainty on the potential participation of non-OPEC producers to the OPEC cut. Importantly, the agreement was followed by comments from Saudi’s energy minister that the kingdom is ready to cut production below the 10.0 mb/d target established on November 30. This comment comforts us in our view that Saudi Arabia has a strong economic and fiscal incentive to cut production to achieve a normalization of inventories, even if it requires a larger unilateral cut.

Going forward, we believe that the observation of the OPEC-11 and Non-OPEC 11 production cuts is required to sustainably support spot oil prices to our 1H17 WTI price forecast of $55/bbl. This forecast reflects an effective 1.0 mb/d cut vs. the 1.6 mb/d announced cut and greater compliance to the announced cuts is therefore an upside risk to our forecasts. But, while better compliance than we expect would initially lead to higher prices – with full compliance worth an additional $6/bbl to our price forecast – we expect that a greater producer response, especially in the US, would eventually bring prices back to $55/bbl. Ultimately, this remains a short duration cut in our view, targeting excess inventories and not high oil prices.

So in other words, US zombie producers could still throw a monkey wrench in this whole effort if they start pumping again once prices recover to $55/bbl.

Meanwhile, as Bloomberg reported on Sunday evening, “money managers have bailed out of WTI short bets after the OPEC deal.”:

Short positions held by money managers fell by 65,848 contracts of futures, options to 80,285 in week ended Dec. 6 CFTC data show.

• Decline of 45% biggest percentage drop since March 2011