Goldman Sachs' commodity analysts are a merciless bunch. Just the other day they warned that if OPEC fails to agree on a freeze, crude oil prices will dive back to US$40, adding that even if the agreement was reached, non-OPEC producers would continually ramp up their production, rendering any deal ineffective.
Now, the same analysts have released a report saying that Russia's oil output will hit 11.7 million bpd in 2017, an upward revision of a previous estimate that claimed average daily output would be nearer to 11.4 million barrels. The earlier estimate envisaged the 11.7 million bpd mark wouldn't be reached until 2018, but Russia appears to be ramping up production faster than most observers seem to have expected.
It's a bit strange that the investment bank's analysts were this surprised, given that earlier this year, Goldman Sachs said Russia's oil companies can remain free cash flow positive at any price above US$10 a barrel of crude. Perhaps it was the rate of production increase that was surprising, rather than the increase itself.
Goldman wasn't the only one surprised. The International Energy Agency (IEA) said back in July that Russia's output was bound to fall to 10.94 million bpd this year because of oil transportation challenges. The challenges included pipeline capacity that would be insufficient to handle all the production from new fields.
It seems that the local E&Ps were able to overcome these challenges, because in its latest Oil Market Report, the IEA noted that the Russian energy business had "impressive resilience" as well as a 4-percent increase in local demand in August, bringing the total daily figure to over 4 million barrels of crude, despite the ongoing recession.
There's too much surprise when there should be none, and Goldman Sachs analysts are aware of it. It was they who noted that Russian producers enjoy some of the lowest-cost fields in the world, along with a favorable tax system, which "…plays a supportive role in a lower oil price environment, as taxes decline with the oil price."
The wider implications of Goldman's forecast revision are simple: the likelihood of OPEC agreeing to any sort of production freeze or even cut is getting slimmer by the hour. Russia has been guarded in its promises, basically repeating again and again that it's all for a freeze, but not offering any details as to how it would take part in a freeze. Russia's noncommittal commitment is wise, given that there appears to be a shortage of OPEC members ready to fall on their own sword, the absence of which renders Russia's "willingness" to freeze production itself an empty promise.
And as Goldman Sachs prudently pointed out, even if the cartel does what now seems next to impossible, the small cut being proposed is unlikely to have much of an effect on the market, aside from the fact that as soon as an agreement is announced prices will spike. This spike will be temporary, as those OPEC members that have been exempted from the freeze negotiations will waste no time increasing their output to reclaim any market share left wanting.
Libya and Nigeria together last month added 800,000 bpd to OPEC's total, Bloomberg reported on Monday-a figure that exceeds the cut that OPEC had proposed.
Over the last week, Russia launched production at two new fields, proving the old truth about actions speaking louder than words. The way things are looking right now, the only surprise left to be had would be an OPEC-Russia agreement to cut production in a large enough quantity to rebalance the market.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
Looks like it will happen again
My math say 10.7 x 60 is better than 11.7 x 45. But hey who is to argue with Putin or GS
That being said isn't GS the same company that told its clients to go long before the 2008 crisis while it was betting behind the scenes against them?