OPEC Coordination Expected to Fail
Months after the Organisation of the Petroleum Exporting Countries (OPEC) agreed to slash production levels, the deal to prop up crude oil prices seems to have failed, says Goldman Sachs Group Inc (NYSE:GS).
The 14-member group of oil producers cannot seem to get its act together, because any country that begins to cut its output risks losing market share to one of its more opportunistic “allies.”
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“The OPEC consultation in Vienna last weekend was only a technical meeting,” wrote Goldman Sachs analyst Damien Courvalin. He noted that a “lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30.” (Source: “Goldman Warns Oil Headed To Low $40 On “Declining Probability Of OPEC Deal”,” Zero Hedge, November 1, 2016.)
Oil prices had risen sharply earlier in the year when a deal seemed more likely. When WTI Crude prices topped $50.00 per barrel, Saudi Arabia capitalized on the opportunity by holding its first international bond issuance. The Middle Eastern powerhouse raised $17.5 billion in foreign money through that one issue.
But Courvalin doesn’t think this optimism can hold out over the next year. “The lack of an agreement so far has pushed oil prices sharply lower, with weakening oil fundamentals warranting oil prices in the low US$40s/bbl in our view if OPEC is unable to deliver a convincing agreement,” he wrote.
By Courvalin’s account, the decreased probability of a coordinated production cut means that oil prices are headed lower toward the end of the year, but that’s not all that is weighing on the commodity.
The Goldman Sachs note also shows skepticism that OPEC will be able to honor a new deal once it is crafted. Some observers have noted that the last agreement failed to specify how much each country would cut, meaning the deal fell through because of “lack of execution.”
But Courvalin and his team at Goldman Sachs think that the inherent politics of OPEC make it difficult for a deal to hold up. “Even if the fear of such low prices leads OPEC to deliver an agreement on November 30, we reiterate our view that the odds of it succeeding are low,” they wrote.
