Goldman Sachs raised Friday its oil price forecasts for 2017 after reassessing the likelihood that key global oil producers, led by Saudi Arabia, will stick to output cut pledges under OPEC's efforts to clear the oil market glut.
The bank raised its Q2 2017 WTI price forecast to $57.5/b from $55/b and said it sees strong compliance with the announced output cuts pushing average WTI prices to $55/b in the second half of the year, $5/b above previous estimates. The WTI forecast for Q1 2017 was unchanged at $55/b.
After analyzing Saudi Arabia's fiscal revenue outlook for 2017, the bank said it sees the motivation for an average 84% compliance with the announced collective OPEC and non-OPEC production cuts which it estimates at a total 1.6 million b/d.
"Ultimately, our work on Saudi Arabia's fiscal balance suggests that the kingdom has a strong incentive to cut production to achieve a normalization of inventories, even if it requires a larger unilateral cut, consistent with comments last weekend by the energy minister," Goldman said in a note.
Saudi energy minister Khalid al-Falih on Saturday said his country was prepared to slash production below 10 million b/d, after having previously agreed to cut down to 10.058 million b/d.
Goldman said it has raised its Brent oil price forecast from $56.5/b to $59/b in the second quarter of next year and expects Brent to average $57.4/b in 2017, a $3.4/b increase from previous estimates.
The update comes just five days after Goldman had stuck with its oil price forecasts despite additional output cut pledges by non-OPEC producers over the weekend. At the time, the bank expected compliance with the targets to be low, with an average 1 million b/d impact on global oil production in the first half of 2017.
Bank of America and Barclays on Monday also maintained their oil price forecasts citing concerns over compliance and the potential for a rebound in US tight oil production in the second half of the year. Goldman warned Friday that returning crude volumes from Libya and Nigeria in addition to greater dollar strength could also limit the near-term upside for oil prices.
IMPACT OF SHALE REBOUND
Goldman said it has also raised its expectations of US tight oil production growth during the second half of 2017 by 300,000 b/d on the back of the firmer short term price outlook.
Looking ahead, however, the bank cut its oil price forecasts for 2018 based on expectations that cost deflation, productivity gains and upstream investment will pick up next year as the price stabilizes around $55-$60/b.
"In addition, the low-cost producer response to drill for more oil will likely limit the rebound in costs for the rest of the industry, as activity will rise in the most productive areas with the largest oil reserves, extending the oil service spare capacity," the bank said.
As a result, Goldman lowered its average Brent price forecast from $63/b previously to $58/b in 2019, a level at which it is "increasingly comfortable that the global market can remain balanced at."
