‘Wall of Supply’ to blunt oil market rally at US$55/barrel: Goldman Sachs

Rising prices would fire up production from US shale drillers

PUBLISHED : Thursday, 06 October, 2016, 2:36am
UPDATED : Thursday, 06 October, 2016, 2:36am

Oil’s rally will stall at US$55 a barrel as US shale drillers get back to work and a “wall of supply” from investments made over the past decade hits the market, Goldman Sachs said.

Global oil markets are set to remain “very oversupplied” in 2017 amid the return of disrupted output in Nigeria and Libya, resilient US shale production and the start of major projects commissioned over the past 10 years, Goldman’s head of commodities research Jeff Currie said in an interview.

“We’re still seeing a lot of oil enter this market,” Currie said. “It’s hard for this market to go above $55.”

US oil futures climbed to a three-month high in New York on Wednesday, trading near $50/barrel.

“The sweet spot is 2017” for supplies coming from new projects reaching world markets, Currie said. The outlook for an oversupplied market next year drove OPEC’s announcement in Algiers last week that it will cap production at 32.5 million to 33 million barrels a day, he added.

Shale producers are hedging their output as soon as prices climb to a range of $50 to $55 a barrel, allowing them to continue drilling, Currie said. The number of rigs targeting crude in the US has risen for a fifth week to the highest since February, Baker Hughes Inc. said on September 30.

While investment in new oil supply has been cut, any shortage in the market is “years off,” Currie said. A “bull state,” where output shortfalls push prices above $100 a barrel, couldn’t happen before 2019 or 2020, he said. Oil futures haven’t traded above $100 since 2014.

US energy envoy: OPEC production deal will not work

Separately, Saudi Arabia, the world’s largest crude exporter, cut pricing for November oil sales to Asia and Northwest Europe and for most grades to other regions amid a global supply glut.

State-owned Saudi Arabian Oil Co., known as Saudi Aramco, lowered its official pricing for Arab Light crude to Asia by 25 cents a barrel to 45 cents less than the regional benchmark, it said Wednesday in an e-mailed statement.

The company had been expected to widen the discount for shipments of Arab Light by 30 cents a barrel, to 50 cents less than the benchmark for buyers in Asia, according to the median estimate in a Bloomberg survey of six refiners and traders.

OPEC reaches deal to cut oil output with full details only in November

OPEC last week agreed to trim oil production for the first time in eight years after prices dropped to about half their levels in 2014. The decision meant the group abandoned a two-year-old, Saudi-led policy of letting members pump as much as possible to push higher-cost producers out of the market. That policy has contributed to a global supply glut, with output from Organization of Petroleum Exporting Countries reaching record highs.

“Aramco’s mandate is still to target market share,” Matt Stanley, a Dubai-based oil broker at Freight Investor Services, said by phone. “They are going to be as competitive as possible even if OPEC has agreed to cut production to help prices.”