Oil: OPEC compliance remains high despite usual data volatility

Analysts at Goldman Sachs explains that the recently oil prices declined following the release of February output estimates by OPEC which featured higher Saudi production as these data points were however for “direct communication” reporting, with the “secondary sources” used to track compliance to the cuts showing instead sequentially lower production for Saudi and on aggregate in February.

Key Quotes

“Further, Saudi Arabia has since commented that the extra production was dedicated to domestic storage and not the international market, which would help reverse the 57 million barrel decline in crude stocks in the Kingdom since October 2015 and be consistent with higher reﬁnery runs locally in February. As a result, we believe that data available across sources for February continues to show rising compliance to the cuts, consistent with our prior assessment.”

“We therefore reiterate our view that the oil market rebalancing is still progressing, with continued evidence of strong demand over the past weeks comforting us in our forecast that oil demand is ﬁnally set to overtake supply in 2Q17, helped by the cuts and despite the expected rise in US shale output. Our expectations that inventories will draw through 2017 therefore leads us to expect that Brent timespreads will continue to strengthen with the forward curve in backwardation by 3Q17.”

“We however also reiterate our view that we believe it is not in OPEC’s interest to extend its cuts beyond six months as its goal is to normalize inventories, not support prices. As a result, our base case remains that the production cuts will be followed by new production highs. Combined to the shale ramp up and greater visibility on the majors shifting focus to future growth, we see potential for long-dated oil prices to continue to decline below our $50/bbl long term price forecast.”

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