Goldman Sachs: Recovery in Oil Prices is Fragile

  • Iran moves to support OPEC’s talks

Ejiofor Alike with agency reports

Investment bank, Goldman Sachs, has said that the 15 per cent recovery of crude oil price since the beginning of this month on speculation of a reduction in output by the Organisation of Petroleum Exporting Countries (OPEC) is fragile due to signs that disrupted production in Nigeria, Iraq and Libya will be ramped up.

This is coming as strong indications have emerged that Iran is sending positive signals that it may support joint action to prop up the oil market, potentially aiding efforts by the Organisation of Petroleum Exporting Countries (OPEC) to revive a global deal on freezing production levels.
Iran, OPEC’s third-largest producer, which has been increasing output after the lifting of Western sanctions in January, had refused to join a previous attempt this year by OPEC and non-OPEC members such as Russia to stabilise production, and talks collapsed in April.

Oil supply from Nigeria, Libya and Iraq has been hit by political instability and conflicts that have abated recently, enabling crude oil shipments to move.

Iraq plans to increase exports of Kirkuk crude by 150,000 barrels per day while the Niger Delta Avengers, which launched attacks on oil facilities in the Niger Delta since February, said it was ready for a ceasefire and dialogue with the federal government.

A prolonged ceasefire by the Avengers will potentially lead to the recovery of over 700,000 barrels per day that was shut due to the attacks on oil facilities by the militant group, thus putting the anticipated price recovery in jeopardy.
Apparently due to strong indications that disruptions in Iraq, Libya and Nigeria are easing, Goldman Sachs reckons that the recovery remains fragile

The investment bank said the improved supply could push the global oil market into a surplus, compared with its earlier forecast of a 230,000 barrel – per -day average demand-supply deficit.
“Even if flows fail to materially increase in each country, we reiterate our view that the oil price recovery is tenuous,” Reuters quoted Goldman Sachs analysts as saying.

According to the investment bank, should the disrupted production rebound in a sustained fashion, crude oil prices will drop to $45 a barrel against the bank’s current $52.5 a barrel forecast.
“While oil prices have rebounded sharply since August 1, we believe this move has not been driven by incrementally better oil fundamentals, but instead by headlines around a potential output freeze as well as a sharp weakening of the dollar,” Goldman analysts reported.

“Given the large uncertainty on the timing, magnitude and duration of such supply shifts, we continue to view oil as having to price near-term fundamentals with a lower emphasis on the more uncertain longer-term fundamentals,” the analysts added.

Goldman is sticking to its forecast of $45-$50 per barrel forecast for Brent crude oil through next summer.

On the plan by OPEC to meet next month in Algeria, the investment bank said the meeting would unlikely affect prices significantly.

“In our view, thawing relationships between parties in conflict in areas of disrupted production would be more relevant to the oil re-balancing than an OPEC freeze which would leave production at record highs and could prove counterproductive if it supported prices further and incentivised activity elsewhere,” the analysts added.

In a related development, Iran is sending positive signals that it may support joint action to revive a global deal on freezing production levels at talks next month.

Though Iran has not yet decided whether to join a new effort, Tehran appears to be more willing to reach an understanding with other oil producers. Venezuelan Oil Minister, Eulogio Del Pino last week visited oil-producing countries, including Saudi Arabia and Iran to rally support for a deal.
Despite rising this year, oil at around $49 a barrel is less than half its $115 per barrel level of June 2014.

OPEC sources say Iran’s participation in a production pact has been the main stumbling block in reaching a deal.