Output Freeze No Help | Russell T. Rudy Energy LLC
A recent article in “World Oil” reports that Goldman Sachs dismisses the impact of the recent oil production freeze agreed to by Saudi Arabia, Russia, Venezuela and Qatar. While an agreement between OPEC and outside producers would be the first in fifteen years, analyst Jeffrey Currie questions whether it will ever materialize.
Further, to really be effective, a production freeze would have to include Iraq, Iran and other large exporters. While Iraq has indicated it was prepared to back the plan, Iran seems determined to produce as much as it can, no matter what other countries do.
Goldman Sachs also sees a production freeze as self-defeating. U. S. shale producers would react to any price increase by producing more oil and driving the price back down. Consequently, the investment banking firm is sticking by its forecast of volatile prices within a limited range of low prices until global inventories start shrinking.
Oversea-Chinese Banking Corp. has a different view. They think that a production cut will happen sooner or later and that OPEC could call an emergency meeting as early as March. Economist Barnabas Gan with the bank observed, “We think that a production cut in the major oil producers will happen in 2016. This event, coupled with demand growth to stay positive, would rally both WTI and Brent to our year-end forecast of $50/bbl.”
Nevertheless, Goldman’s Currie sees Iran’s commitment to growing production and recovering lost market share as a major stumbling block to any output freeze. However, he did concede that Iran’s impact might be less than originally feared. He opined, “We remain conservative on our Iranian production growth forecast given the only limited increase in exports achieved so far and the limitation that the remaining U. S. sanctions create in ramping up output.”
Only time will tell who is right. However, if global inventories are continuing to build at current production rates, freezing them will only increase the oil glut and do nothing to restore prices.
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/2/17/freezing-oil-output-won-t-help-prices-goldman-says .
