Photographer: Andrey Rudakov/Bloomberg

Goldman Says Oil Market's Too Jittery When There's No Need to Be

Updated on
  • OPEC deal cuts risk of surprise supply gain, excess stock draw
  • Bank says backwardation may be greater than current projection

Don’t worry about long-term oil supply, according to Goldman Sachs Group Inc.

While OPEC and its allies including Russia didn’t finalize details on how they would wind down output curbs that’ll continue until the end of 2018, they pledged to be “agile and responsive” and review their progress on shrinking inventories at a meeting in June, the bank said in a report. That indicates a reduced risk of both unexpected increases in supply as well as excess draws in stockpiles, according to Goldman.

“This leads us to reiterate our view that long-dated implied volatility remains too rich,” analysts including Damien Courvalin and Jeffrey Currie wrote in the Nov. 30 report, referring to a measure of investor anxiety.

The Organization of Petroleum Exporting Countries and partner nations outside the group agreed in Vienna on Thursday to prolong their deal to limit production beyond its previous expiry date of March 31. The pact was even beefed up through the inclusion of Nigeria and Libya, two OPEC members originally exempted from the curbs.

The duration of the extension helps defuse the risk of a sharp increase in production from currently high and rising available spare capacity, according to Goldman. While Nigeria and Libya have committed to keep their production below their 2017 highs of a combined 2.8 million barrels a day, the bank wasn’t expecting either of the countries to exceed those level next year.

Oil producers are aiming to return stockpiles to their five-year average by keeping 1.8 million barrels a day of cuts in place for a further nine months. Since the pact started about a year ago, global inventories have fallen and prices have jumped. Still, the group faces the risk of a new flood of oil coming from U.S. shale fields as crude strengthens.

Brent crude, the benchmark for more than half the world’s oil, climbed 61 cents to $63.24 a barrel at 10:34 a.m. in London. West Texas Intermediate, the U.S. marker, was up 41 cents at $57.81 a barrel in New York.

While the inventory target level remains more aggressive than Goldman currently assumes in its balances, the bank sees OPEC’s assessment of the medium-term supply response to higher prices as too conservative, with forward prices above the industry’s marginal cost, it said in the report.

“Combined, these point to potentially even greater backwardation than we currently project through 2018 although with lower deferred prices,” the analysts said, referring to a market structure where near-term futures are costlier than later contracts.

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