Banks sceptical of Opec decision

Goldman Sachs Group said the Organisation of Petroleum Exporting Countries' (Opec's) deal to cut output could add as much as US$10 a barrel to oil prices, though it remains sceptical, along with other banks, on how the accord will be implemented.

The plan to reduce production to a range of 32.5 million to 33 million barrels a day "will likely provide support to prices, at least in the short term", Goldman said in a report on Wednesday, but maintained its crude forecasts for this year and the next. Uncertainty in the market will persist in the coming months, and output quotas could still be exceeded even if the proposal is ratified at a formal gathering in November, added Goldman.

Opec produces more than 40 per cent of the world's oil, so coordinated production cuts can have an immediate impact on global supply and demand balances. There is no detail yet on the production quota levels for each country, which would be "the major dispute", Citigroup analysts said in an e-mail on Wednesday.

Citigroup sees oil trading between US$40 and US$50 a barrel through the end of the year, with Brent crude rising to a US$60 average next year. Goldman sees oil ending 2016 at US$43 a barrel and rising to US$53 next year.

Brent crude, the benchmark for more than half the world's oil, fell 55 cents to US$48.14 a barrel on the ICE Futures Europe exchange at 9.59am in London.

Asian crude oil buyers remained cautious, studying details of the Opec deal after the oil producers' group agreed for the first time since 2008 to reduce output in an oversupplied market.

Global oil prices held on to gains yesterday after soaring 6 per cent in the previous session as Opec agreed on Wednesday to reduce output. However, how much each country will produce is to be decided at the next formal meeting in November.

"We have to wait and see whether they will take real action and how long it would last," said Ms Kim Woo Kyung, a spokesman for SK Innovation, owner of South Korea's largest refiner.

The Opec deal is unlikely to affect Middle East crude supplies to term customers in Asia for next year, but may crimp additional volumes that producers have been offering throughout this year, traders said. "They've been giving incremental volumes, and so there may be less for next year," said a trader who declined to be named.

Still, robust oil demand in Asia has absorbed much of the increase in Opec production and may provide little impetus for Opecto cut output unless demand drops.


A version of this article appeared in the print edition of The Straits Times on September 30, 2016, with the headline 'Banks sceptical of Opec decision'. Print Edition | Subscribe