Doha freeze talk failure, Kuwait oil strike means further market volatility in near term – Goldman Sachs

The inability of oil producing nations to reach an agreement in Doha to freeze production and a sudden strike by oil workers in Kuwait will lead to further price volatility in the near term, Goldman Sachs said in a research note..

While there’s potential for above-expectation production from multiple OPEC members, including Iran, Libya and the Neutral Zone (an evenly split partnership between Kuwait and Saudi Arabia) in the coming months, Courvalin and Currie maintain that non-OPEC production declines will lead to a sustainable deficit in the third quarter and ultimately support a rebalancing of the oil market, the research note said.

The Doha talks between OPEC and several non-OPEC producers, which had prompted an increase in prices in a world flush with oil, broke down after participants said they needed more time to reach a deal. The key stumbling block, the note said, appears to be the requirement by Saudi Arabia that Iran participates in the deal.

“On its own, we view this outcome as bearish for oil prices given consensus expectations for a “soft guidance” freeze at January production levels. But this lack of an agreement does not imply that OPEC production will recover in the short-term, as the year-to-date stabilisation owes to ongoing disruptions and maintenance rather than coordination,” analysts Damien Courvalin and Jeff Currie said in the note.

It is further of no impact to our forecasts as year-to-date production of OPEC (ex. Iran) and Russia have remained close to our 2016 average annual forecast of 40.5 mb/d, they added.

According to Goldman Sachs, the Kuwait’s oil worker strike, which has reportedly led to crude production falling to as low as 1.1 mb/d from 2.85 mb/d in March, is significant and can lend further support to the recent strength in Brent and Dubai time spreads.

While this strike may be short lived since it is a labour dispute and not a disruption, ongoing OPEC production disruption, gradually declining non-OPEC production as well as planned maintenance in the face of resilient oil demand in the first quarter have recently pointed to improving oil fundamentals, the note said.

“Our outlook for oil prices remains that gradually improving fundamentals, driven by non-OPEC production declines and not OPEC or Russian production, will bring the market into a sustainable deficit in the third quarter of this year, which will maintain a deeper backwardation across both Brent and WTI forward markets.”

Low prices earlier this year lead non-OPEC producers to guide to lower production, with recent data confirming these declines in the US as well as in other high cost producers such as China, Latin America and the FSU, it said, adding that preliminary first quarter demand also surprised to the upside in India and Russia.

“And while the market remained in surplus in 1Q16, March high frequency stock data show a modest product led 2.5 mb draw relative to seasonal. The risk to higher oil prices in coming weeks is that this recent improvement in fundamentals was helped by disruptions and maintenance, which have reduced global supplies by 500 kb/d in March-June (ex. Kuwait), with the demand surge seasonally driven, all suggesting that once this passes, the rebalancing process and inflection phase will continue for several more months,” the note added.

In fact, beyond the end of disruptions and maintenance, there remains potential for higher production than we forecast from several OPEC members. Iran, the Neutral Zone and Libya could potentially provide additional production growth in coming months, with vessel tracking over the past two weeks pointing to rising Southern Iraq and Iran exports, it pointed out.

“Finally, while we expect Saudi production to only rise to 10.35 mb/d during the second quarter, this simply reflects a smaller than seasonal increase in Saudi crude burn for power generation, given (1) normal weather vs. last year’s average hot temperatures, (2) the ramp-up of the Wasit gas processing plant, (3) reduced fuel subsidy and government expenditures and (4) potentially reduced military demand should the Yemen truce, started April 10, prove sustainable. We therefore view risks to our Saudi forecast as skewed to the upside,” the analysts said.



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