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OPEC and the non-cartel producers that have joined the effort to reduce global oil supply have a high incentive to bring about a fast normalization of crude inventories, which would make longer-term futures contracts cheaper than near-term ones, and could make shale competitors less eager to lock in 2018 output.
This is the opinion of Goldman Sachs analyst Damien Courvalin, who sees the compliance in the agreed OPEC/NOPEC cuts at 84 percent, Bloomberg reports, quoting a Courvalin note to clients from Wednesday.
If OPEC and non-OPEC producers were to avoid cheating this time round, the futures curve would move into backwardation, meaning that a futures contact with a longer-term expiry would be now trading cheaper than one expiring earlier. Before the November 30 OPEC deal to curtail output and the subsequent pledge of 11 non-OPEC producers to cut a combined 558,000 bpd, the futures curve was in contango.
However, over the past five weeks, the Brent futures curve has moved into backwardation, and this could be an early signal that OPEC’s efforts to draw down inventories and stave off en masse shale production may be working, a Bloomberg graphic shows.
According to Goldman Sachs’ Courvalin, the moving into backwardation could mean that the higher-cost shale might find locking 2018 production less attractive.
The “normalization of inventories is key to low-cost producers” Courvalin says in the note, as quoted by Bloomberg.
“It generates backwardation, which removes hedging gains from high-cost producers and helps low-cost producers grow market share,” the analyst notes.
Goldman Sachs has also recently said that OPEC cuts would push the oil market into deficit in the first quarter, which in turn would move the market into backwardation by the summer.
However, U.S. shale is also expected to respond to higher oil prices, which implies limited upside in crude prices above the high-$50s, Goldman Sachs noted.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.