(Reuters) - Goldman Sachs expects prices for prompt delivery of Brent crude oil to remain high, supported by falling inventory levels and by OPEC’s drive to curb production.
When the futures market shows near-dated oil contracts trading above those further out, a pricing structure known as backwardation emerges, which indicates that traders believe supply is becoming restricted and encourages anyone storing up physical oil to release their stocks.
“Backwardation will be kept in place by the maturity mismatch of a much greater incentive for private and sovereign producers to hedge future production, tight physical product markets and high margins supporting refinery ... spot buying,” Goldman said.
The Organization of the Petroleum Exporting Countries, Russia and some other non-member producers are cutting their collective output by about 1.8 million barrels per day (bpd) until next March to run down a price-sapping supply glut.
OPEC and its allies are now considering extending the deal beyond March.
Goldman Sachs, which left its year-end and 2018 price forecast unchanged at $58 per barrel, said it expects OPEC to regulate supply in order to push inventories down toward their longer-term averages as long as this did not imply any loss in market share or revenue, which could be achieved in 2018.
The price of Brent crude oil is currently trading around $57.00 a barrel, having risen from six-month lows below $45 a barrel in June.
Goldman added that it expects a modest surplus in 2018, as a marginally smaller increase in U.S. shale oil output is offset by an acceleration of growth in other non-OPEC supplies as new projects come online, and higher permitted production from Libya and Nigeria.
“While the gradual shift from large stock draws to modest builds is likely to keep a lid on prices, we believe this is not the beginning of large inventory builds,” Goldman said.
The investment bank said it was unlikely that the momentum in stock drawdowns will fade, especially given the signs of an increased commitment from OPEC to contain output and strong demand growth.
Reporting by Nallur Sethuraman in Bengaluru; Editing by Amanda Cooper, Greg Mahlich