Will OPEC members and Russia live up to their commitments to cut production?

Bloomberg/Fuel Fix:
Oil prices may break above $60 a barrel if OPEC and Russia fully adhere to their promises to pump less, says Goldman Sachs Group Inc.

West Texas Intermediate could rise by $6 above the bank’s current forecast of $55 a barrel and $56.50 for Brent in the first half of 2017, Goldman Sachs said in a Nov. 30 note. That’s if the organization complies as promised with a new production target of 32.7 million barrels a day, coupled with 350,000 barrels a day in cuts from non-OPEC members Russia and Oman.

Banks from Goldman to UBS Group AG are turning more bullish on oil after the Organization of the Petroleum Exporting Countries’ first agreement to reduce output in eight years. The group’s deal to curb production by 1.2 million barrels a day was broader than expected, with Russia nodding to unprecedented cuts. Morgan Stanley predicts the market to rebalance in the first half of 2017.

“Focus will now shift to implementation,” with the deal agreed to in principle and country level quotas established, analysts including Damien Courvalin and Jeffrey Currie said in the 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.”

The bank’s main forecast is based on OPEC cutting oil production to 33 million barrels a day, reflective of a 73 percent compliance to Wednesday’s target. Also prices above $55 are not sustainable should U.S. shale producers ramp up output as well as if there is greater brownfield spending elsewhere, Goldman said. Oil at that level would lead to a “sizeable shale response,” adding 800,000 barrels a day in 2017 versus oil at $45, the bank said, reiterating its WTI crude forecast of $50 for the second half of next year.
I view the commitments as tenuous.  Russia is trying to get voluntary compliance from independent oil companies as well as forcing the large state-owned oil company to cut back.

Their real problem is that at $60 a barrel more oil will be produced in the US shale fields which will result in lower purchases from the OPEC countries by the US consumers.  The US is also now exporting oil and will be competing with the OPEC countries in the market place.

President-elect Trump has indicated he will support increased domestic production and remove restrictions on drilling imposed by President Obama.  His goal is to make the US self-sufficient in energy production which will mean OPEC will lose one of its biggest customers.  


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