Goldman Says Rather Than Price Setter, OPEC Is Now An Inventory Manager

Goldman Sachs analysts say that an oversupply situation would be created and a big problem faced for efforts by major oil producing nations to support prices by an increase in new production projects and a shale boom.

Record production capability coming on stream would be seen, expects the analysts,, between the years 2017 to 2019. The Goldman Sachs analysts wrote in a note that the relative benefit of stability by extending production cuts versus the risk of long-term market share loss should therefore now be weighed by the Organization of the Petroleum Exporting Countries  as a result.

“Our database of the industry’s new oil & gas developments shows that 2017-19 is likely to see the largest increase in mega projects production in history, as the record 2011-13 capex (capital expenditure) commitment yields fruit,” the analysts said.

“A key unknown is how well the industry will delivery (on the projects)… the industry has been poor at delivering historically, but has much improved in the last three years,” they added.

Late on Tuesday night according to U.S. hours, announcement that the country’s crude inventories rose 4.5 million barrels to 533.6 million barrels at the end of last week, beating expectations of a 2.8 million barrels increase was made by the American Petroleum Institute and following this report crude oil pieces extended losses during Asian hours on Wednesday.

The efforts led by the OPEC to cut supply in order to support prices are being undermined by such rise in oil stocks and increase production in the U.S.

The cartel was joined by other major producers led by Russia that pledged an additional 558,000 barrels per day in cuts after the OPEC agreed to reduce output by 1.2 million barrels per day from January to June this year.

OPEC’s role has transitioned from a price setter to an inventory manager, Goldman Sachs said, and added that as the impact has waned with a supply response by producers outside of the pact, there have been talks that OPEC is considering extending those production cuts beyond June ahead of its meeting in May.

The investment bank said that the U.S. shale producers have been unintentionally helped by the extended OPEC decision to cut output which may have stabilized prices for a while.

“OPEC’s decision in November 2016 to cut production was rational, in our view, and fit into its role of inventory manager of last resort,” the analysts said.

“However, the unintended consequence was to underwrite shale activity through a bullish credit market at a time when delayed delivery of the 2011-13 capital spending boom could lead to record non-OPEC production growth in 2018,” they added.

(Adapted from CNBC)

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Categories: Economy & Finance, Strategy, Sustainability, Uncategorized

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