Oil: OPEC down to the wire – Goldman Sachs

Research Team at Goldman Sachs, notes that while the latest OPEC headlines suggest that while there is a broad agreement on the rationale for a cut, political considerations and country level quota negotiations are so far preventing a deal from being reached.

Key Quotes

“As a result, it will likely take intense negotiations on Wednesday before a decision is made.

• Subject to the usual modeling caveats, our analysis suggests that as of Monday’sn close, Brent futures are reflecting a 30% probability of a deal being reached with Brent near-dated implied volatility pricing in a $6/bbl move on Wednesday, five times more than the daily implied moves for other trading days.
• If the proposed OPEC production cut to 32.5 mb/d is agreed to, we would expectn prices to rally to the low $50s/bbl, with observed implementation required to support prices further. Given historical observed compliance to announced production cuts, this would be the equivalent of realized 1H17 OPEC production of 33.0 mb/d and a Russia freeze, which would warrant $55/bbl oil prices in 1H17 and backwardation by 2Q17.
• If no deal is reached, our expectation of rising inventories through 1H17 wouldn warrant prices averaging $45/bbl through next summer. Of course, the absence of a deal would likely exacerbate the initial sell-off given the unwind of net speculative positioning and with a large WTI option open interest around the $40/bbl strike potentially exacerbating a move below that level. However, with the Brent market in our view only pricing in a 30% probability of a deal being reached and the option market pricing in a $6/bbl move, we believe that a move to below $40/bbl would be difficult to sustain. This suggests that price risk is likely skewed to the upside.”