OPEC output cut to encourage 'sharp production' -Goldman Sachs

The logo of Goldman Sachs is displayed in their office located in Sydney, Australia, May 18, 2016. REUTERS/David Gray/File Photo

(Reuters) - Goldman Sachs said on Wednesday that OPEC’s agreement to slash oil output would “unleash a sharp production” response in the United States and the rest of the world.

OPEC agreed on Wednesday to its first oil output cuts since 2008 after Saudi Arabia accepted “a big hit” on its production and dropped its demand on arch-rival Iran to slash output.

“This is a short duration cut, targeting excess inventories and not high oil prices, which would instead unleash a sharp production response both in the U.S. and in the rest of the world,” the U.S. investment bank said in a note.

Non-OPEC Russia will also join output reductions for the first time in 15 years to help the Organization of the Petroleum Exporting Countries prop up oil prices.

“The catalysts for a further rally in prices will need to come from confirmation of participation by non-OPEC producers, evidence of compliance by OPEC producers and more clarity on what Iran has agreed to do given conflicting numbers in the official agreement,” Goldman said.

The bank forecast WTI crude prices touching $55 per barrel and Brent crude $56.50 in the first half of 2017, based on historical compliance to announced quotas and assuming a 33 million-barrels-per-day realized OPEC output in the first half of 2017 as well as a freeze in Russian production.

OPEC produces a third of global oil, or around 33.6 million barrels a day. Under the Wednesday deal, it would reduce output by about 1.2 million bpd from January 2017.

Oil soared more than 10 percent on Wednesday to over $50 a barrel, its highest in a month. [O/R]

Reporting by Vijaykumar Vedala in Bengaluru; Editing by Peter Cooney