Oil bulls could be left disappointed following OPEC's meeting later this week, Goldman Sachs warned Tuesday, claiming a lack of consensus threatens to skewer a widely expected nine-month extension to oil production cuts.
"We believe the absence of such a consensus is due both to the uncertainty on the progress of the oil market rebalancing as well as Brent oil prices trading at $63/bbl," noted Goldman analysts including Damien Courvalin. "With the rhetoric not matching the logic for the first time in years, we believe that the outcome of this meeting is much more uncertain than usual."
International benchmark Brent crude futures for delivery in January traded Tuesday at $63.66, down $0.18 or almost 0.3% on their Monday close. U.S. benchmark West Texas Intermediate futures traded at $57.66, down $0.45 or almost 0.8%.
WTI's fall extends its losses since Friday, when the benchmark touched a more than two-year high of $59.05 on the back of reports that tracked a dip in fuel reserves and disruptions to US supply due to the closure of the Keystone pipeline. The pipeline, which transports fuel to the US from Canada, reopened Tuesday after operator TransCanada Corp. repaired a leak in South Dakota.
OPEC members and Russian representatives will meet in Vienna on Thursday to discuss extending cuts that have removed about 1.8 billion barrels per day of production from global markets since the start of the year. That agreement is due to expire in March.
Saudi Arabia has lobbied heavily for an early extension to the production caps in order to provide further support to oil prices. Russia has proven less enthusiastic, with Russia's economy minister noting last week that reduced oil output had slowed his nation's economic growth, which fell to 1.8% in the third quarter of 2017, from 2.5% in the second quarter.
"We view risks to oil prices as skewed to the downside this week as we believe that current prices, timespreads and positioning already reflect a high probability of a nine-month extension" noted Goldman. "In our oil supply-demand balances, we continue to base case a gradual ramp up in OPEC & Russia production from April onward."
Goldman is forecasting Brent prices of $58 a barrel over the first half of 2018, but admitted that over the near-term oil prices could remain well above that on the back of even a six-month extension to production caps.
"We would still expect compliance to deteriorate and prices to sequentially decline as OPEC and Russia come to the realization that the New Oil Order is alive and well and that prices have overshot the industry's marginal cost," noted the bank.
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