Investors Skeptical of U.S. Oil Producer Discipline, Goldman Says

Oil investors are skeptical about the prospects of another crude price rally, citing doubts about U.S. producer discipline, according to Goldman Sachs.

The bank's team of analysts met with investors in Hong Kong and Singapore last week, discovering that investor sentiment was very similar to its recent meetings with U.S. investors. Goldman found that while drivers of higher oil prices, such as healthy global demand, the possibility of supply disruptions and U.S. producer discipline persist, investors expressed concerns about that last bit.

"Most importantly, investors remain unconvinced U.S. producer discipline will hold," Goldman analysts including Brian Singer, wrote in a Feb. 12 research note. "That supply growth needs to be constrained voluntarily, even in the face of a more constructive demand outlook still leaves investors more focused on other metals and mining where there is greater confidence in China policy-driven supply constraints."

U.S. crude oil production has reached its highest levels since 1970, according to the U.S. Energy Information Administration, or EIA. Production reached 10.038 million barrels a day in November, marking the first time since 1970 that production surpassed 10 million barrels a day. Texas, where the oil-rich Permian Basin is located, reached a record high of 3.89 million a day for the month.

At the beginning of the month, Goldman revised its oil price projections, raising its 3-month Brent crude oil price forecast to $75 per barrel, noting that the markets had rebalanced, in terms of supply and demand, more quickly than anticipated due to the extension of OPEC's production cuts. The bank also increased its 2018 global oil demand forecast to 1.86 million barrels per day, up from 1.73 million barrels per day.

The bank, however, said that it received some pushback to its call for acceleration of demand growth in India, but investors expressed confidence that "China could continue to be a source of upside surprise."

The outlook for long-term car sales in the Chinese market still looks very positive, Goldman said, which should further support higher oil prices. The guidance is for double-digit growth in sales, revenue and net profit for each of the next three years to 2020, Goldman said, citing Geely Automotive.

"There is a lot of interest from China in purchasing more U.S. crude oil and condensate, as U.S. shale production and export volumes continue to increase," the Goldman analysts said. "Given China's oil imports are now the largest in the world, and continue to rise with strong demand growth and about flattish domestic oil production, the U.S. as a new and growing source of seaborne volume is a natural trading partner."

China became the world's largest crude oil importer last year, according to the EIA.

"China surpassed the United States in annual gross crude oil imports in 2017, importing 8.4 million barrels per day, compared with 7.9 million barrels per day for the United States," the EIA said in a Feb. 5 report.

Global benchmark Brent crude futures for April delivery fell 0.2% to $62.72, while West Texas Intermediate, the U.S. benchmark, contracts climbed 0.3% to $59.39 at 2:30 p.m. EST on Monday, Feb. 12.

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