Large Cut from OPEC Would Be 'Self-Negating', Says Goldman Sachs
OPEC is expected to announce a modest production cut when it meets on November 27, said Goldman Sachs Commodities Research analyst Damien Courvalin. The report said a large cut would support prices but would also be self-negating in 2015.
"As we have discussed, we believe it is in OPEC’s interest to share the burden of balancing the oil market surplus with US shale oil production. This can only be achieved by reducing output at a modest pace at first to allow for low prices to slow US production growth," said Courvalin.
"In particular, any large cut that would lead to a large price rally would be self-negating as it would enable US producers to hedge 2015 production and sustain elevated production growth. Recent communication by OPEC members suggests indeed the expectation of only a modest reduction in production, with Libya, Iraq and Iran further commenting that they would not be reducing output. These divergences lower the odds of a coordinated cut, and past quotas have only been loosely implemented," continued the analyst.
". . . we estimate that it would require a cut in production of more than 0.5 mb/d to below the current quota for prices to rally significantly next week, with the current Brent implied volatility term structure already implying a $3.6/bbl move on November 27 (Exhibit 2). Specifically, we estimate that a 1.0 mb/d production cut to 29.5 mb/d could push Brent prices back between $85/bbl and $90/bbl (Exhibit 3). However, uncertainty about the implementation of this new quota and the likely large hedging flows following an initial rally would ultimately cap the price rally and leave our fundamental 2015 balance little changed as higher US production growth would offset lower OPEC output, leaving the oil market oversupplied," he added.
Traders are watching energy futures and ETFs like United States Oil Fund (NYSE: USO).
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