Since the start of August, Crude oil prices have risen about 15% on speculation that OPEC may agree to a production freeze coupled with a weakening U.S. Dollar (although they took a slight hit over the last few days due to an unexpected inventory build). This obviously represents a non-technical correction to the market, not supported by the fundamental driver of oil prices: supply and demand.
While Saudi Arabia, Iran, and Russia spent the last few weeks talking up the possibility of a production freeze (and making money as the price of oil rose in response), on Monday we got news that Iraq, OPEC’s second-biggest producer, said they will increase crude exports by about 150,000 barrels a day over the next few days (a 5% increase) after an agreement was reached to resume shipments from three oil fields in Kirkuk. In addition, according to ExxonMobil, the Iraqi government has asked foreign oil companies to increase oil output and exports this month ahead of the much anticipated informal OPEC meeting in September.
Once again, we see OPEC members scrambling to increase production, not decrease it. With Saudi Arabia at record output, Iran and Iraqi both seeking to add more production, and supply disruptions in Nigeria (potential agreement reached with rebels) and Libya potentially abating, I think the market has way over-hyped the potential for a freeze. Furthermore, even if OPEC agrees to freeze production, the market has ignored that we are at historically high OPEC production levels. A freeze now does nothing to ameliorate the oversupply. Goldman Sachs seems to agree. In a research note released this week, Goldman stated, "Given the large uncertainty on the timing, magnitude and duration of such supply shifts, we continue to view oil as having to price near-term fundamentals with a lower emphasis on the more uncertain longer-term fundamentals.” Additionally, Iran’s oil minister has point blank said Iran would not agree to any production freeze that set their output below pre-sanction levels. However, Iran is expected to reach pre-sanction levels soon, so that does give us a glimmer of hope that they will agree to a production freeze at some point.
Therefore, Goldman is maintaining their forecast of $45-59 per barrel for Brent oil through next summer. Goldman is concerned that improving supply could again push global markets into surplus instead of its earlier forecast of 230k-barrels-a-day deficit.
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