Opec output cuts to ‘unleash sharp production’

Goldman Sachs said that Opec’s agreement to slash oil output would "unleash a sharp production" response in the US and the rest of the world.

Opec agreed on Wednesday to reduce output by about 1.2 million bpd from January 2017. The deal also included the group's first coordinated action with non-Opec member Russia in 15 years.

"This is a short duration cut, targeting excess inventories and not high oil prices, which would instead unleash a sharp production response both in the US and in the rest of the world," the US investment bank said in a note.

"The catalysts for a further rally in prices will need to come from confirmation of participation by non-Opec producers, evidence of compliance by Opec producers and more clarity on what Iran has agreed to do given conflicting numbers in the official agreement," Goldman said.

The bank forecast WTI crude prices touching $55 per barrel and Brent crude $56.50 in the first half of 2017, based on historical compliance to announced quotas and assuming a 33 million-barrels-per-day realised Opec output in the first half of 2017 as well as a freeze in Russian production.

Despite the agreed deal, some doubts over remain with Morgan Stanley analysts as well, who said: "Scepticism remains on individual countries' follow-through, which is keeping prices below year-to-date highs (of $53.73 per barrel in October) for now.”

Meanwhile, Norwegian consultancy Rystad Energy said it expects global liquid production to remain at current levels into next year, while demand is expected to grow by around 1.3 million bpd. This means that the large amount of stored oil will decline considerably in 2017.

"This will be the second year in a row in which global oil production fails to grow”, vice president analysis at Rystad, Espen Erlingsen said. “Shale is the least vulnerable, while offshore continues to be the victim since Opec’s decision in November 2014.”

Rystad’s analysis shows that shale production is expected to grow significantly from 2018, with a yearly addition of 1 million bpd, whilst offshore will see a production decline from 2018.

 "Whilst shale has proven to be resilient with only marginal reduction in produced volumes, only 1.3 billion barrels of new offshore oil volumes are sanctioned in 2016, compared to a yearly average around 10 billion barrels in the period 2010-2013,” Erlingsen said.

According to Rystad, offshore sanctioning activity is at its lowest since the 70’s, and the effect of this will become increasingly visible, with a long term decline in the non-OPEC non-shale production expected.

Oil soared more than 10% on Wednesday to over $50 a barrel, its highest in a month.