Crude Oil: 12m target at $50/bbl – Goldman Sachs

Research Team at Goldman Sachs, notes that oil fundamentals have weakened sharply since OPEC announced a tentative agreement to cut production and GS now expects a large surplus of 0.7 mb/d in 1Q17 in the absence of such a cut.

Key Quotes

“Importantly though, data over the past two months leave us more confident that the global oil market will shift into deficit by 2H17 even with OPEC production above current levels, on the combination of stronger expected demand growth and lower production from high-cost countries in decline.”

“With greater certainty that deficits will finally materialize, there is now a stronger economic incentive for OPEC producers to prevent a further rise in inventories in 1H17 and instead act to normalize the current high level of inventories through a short-duration production cut. In our view, the goal of normalizing inventories should, however, not target elevated oil prices as the flattening of the oil cost curve and the unprecedented velocity of the shale supply response would make such an endeavor rapidly self-defeating above $55/bbl.”

“Our base case is now that an OPEC production cut will be announced and implemented and normalizing inventory levels will generate backwardation by 2Q17. Political risks can still derail an otherwise economically sound decision and we believe an outcome where OPEC does not agree to a cut is near-term bearish – even from current price levels – as it implies greater sequential production from the group in competition for revenues and market share.”