Freezing output won’t help prices — Goldman Sachs

23 February 2016, Lagos—The agreement between Saudi Arabia and Russia as well as other countries to freeze production will have “little impact on the oil market as proposed, while there remains high uncertainty that it even materialises,” Goldman Sachs Group Incorporated has said.

*Barrel of oil.

*Barrel of oil.

This is coming a week after Nigeria’s Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, embarked on a diplomatic shuttle to get Saudi Arabia and Russia to agree to production cuts in order to shore up oil prices.

Kachikwu has been trying to convince the Organisation of the Petroleum Exporting Countries, OPEC, to convene an emergency meeting before the cartel’s scheduled meeting on June 2, 2016.

However, Goldman Sachs reiterated its stand that oil prices will remain volatile while being bound to a range in the coming months until inventories stopped rising.

Oil is trading near a 12-year low as record stockpiles continue to swell more than a year after the OPEC decided to keep pumping to defend market share amid a global glut. Coupled with record Russian output and U.S. shale fields producing more oil and gas than previously estimated, prices could slide below $20 a barrel before the rout is over, Goldman insisted.

“While an agreement could create the perception that more could be achieved, such as production cuts, we believe this would not be sufficient to set a floor on prices as they will only stabilise once inventories stop building,” it said.

The bank predicts that stockpiles may stop increasing in the second half of this year. A broader reduction in output would be self-defeating as shale producers could boost output in 80 days when prices start to recover, it further added.

Brent for April settlement was little changed at $32.19 a barrel on the London-based ICE Futures Europe exchange at 2:34 p.m. Singapore time, while West Texas Intermediate for March delivery traded at $28.95 a barrel on the New York Mercantile Exchange.

Oversea-Chinese Banking Corporation thinks a production cut will occur “sooner or later,” economist Barnabas Gan, said in a report last weekend.

OPEC may call for an emergency meeting as early as March, as the slump in oil prices squeezes profit margins, he said. “We think that a production cut in the major oil producers will happen in 2016,” said Gan. “This event, coupled with demand growth to stay positive, would rally both WTI and Brent to our year-end forecast of $50 a barrel.”

  • Vanguard
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