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Strong compliance to supply cut working to keep oil price stable—Goldman Sachs

Efforts of the Organization of Oil Exporting Countries (OPEC) and non-members to calibrate global oil supply in a way prices should remain stable on a rising spree may be sustained, leading to longer-term futures contracts cheaper than near-term ones, and could make shale competitors less eager to lock in 2018 output.

Damien Courvalin, principal analyst at Goldman Sachs sees the compliance in the agreed OPEC/NOPEC cuts at 84 percent, Bloomberg reports has said.

The report argues that if OPEC and non-OPEC producers were to avoid cheating this time round, the futures curve would move into backwardation, meaning that a futures contact with a longer-term expiry would be now trading cheaper than one expiring earlier. Before the November 30 OPEC deal to curtail output and the subsequent pledge of 11 non-OPEC producers to cut a combined 558,000 bpd, the futures curve was in contango.

Over the past five weeks, the Brent futures curve has moved into backwardation, and this could be an early signal that OPEC’s efforts to draw down inventories and stave off en masse shale production may be working, a Bloomberg graphic shows.

According to Goldman Sachs’ Courvalin, the moving into backwardation could mean that the higher-cost shale might find locking 2018 production less attractive.

The “normalization of inventories is key to low-cost producers” Courvalin says in the note, as quoted by Bloomberg.

“It generates backwardation, which removes hedging gains from high-cost producers and helps low-cost producers grow market share,” the analyst notes.

Goldman Sachs has also recently said that OPEC cuts would push the oil market into deficit in the first quarter, which in turn would move the market into backwardation by the summer.

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