The gusher of American shale production has failed to stop the rise in oil prices and Goldman Sachs predicts that more increases lie ahead, thanks to OPEC’s unexpected success at putting a lid on output.
“Core-OPEC producers are adopting a shock and awe strategy, and exceeding their cut commitment,” Goldman analysts wrote in a just-issued report.
The Organization of Petroleum Exporting Countries plus their allies like Russia have shown unaccustomed discipline at reducing production. In the past, lower-production pledges often fell victim to cheating, as some producers sold more oil than they promised.
This consortium has dropped production by 0.8 million barrels per day in January, compared to December, the Goldman report indicated. Result: With less oil is on the market, and more stockpiling occurring, the oil price grows more expensive.
Inventories have expanded worldwide, even in the US, where bad weather in the Gulf of Mexico has limited offshore production. Plus, pipeline bottlenecks in the Permian shale basin have curbed domestic shipments. Added to that are the political troubles in Venezuela and Washington’s sanctions on that Latin American nation’s oil industry.
The current tumble in oil prices has been precipitous. From $85 per barrel last October for Brent crude, the international, non-US standard, the price slid to $50 last month. Only recently has it nudged up, rising almost 2% Wednesday to slightly over $63. Goldman predicted that the Brent price would hit $67.50 next quarter.
Meanwhile, West Texas Intermediate futures, the US standard, took a similar dive and recovered. WTI climbed 1.5% Wednesday to almost $54.
Oil price moves are two-edged, of course. Sometimes, what is good for oil producers is not good for consumers, and vice-versa. Aside from the threat to the economy that the trade war brings, John Lynch, chief investment strategist at LPL Financial
noted that a “potential sharp drop in oil prices poses another risk, though the potential energy cost savings for consumers and businesses would help offset the drag on energy sector profits.”
Goldman, though, was not optimistic that the higher prices would last. The firm said it was “cautious” about prices for this year’s second half, as production costs are dropping, which could translate into higher output.