A new report by the investment bank Goldman Sachs (NYSE:GS) indicates that there is only an 84% chance that the OPEC oil production reduction deal will succeed this year. The deal to reduce oil production by millions of barrels per day, and increase prices, went into effect on Jan. 1, 2017.
The investment bank note, sent by Goldman Sachs oil analyst Damien Courvalin, indicated that the normalizaiton of inventories is the “key” to success for low-cost producers.
“That generates backwardation, which removes hedging gains from high-cost producers and helps low-cost producers grow market share.
According to Goldman Sachs, the moving into a phase of “backwardation” could mean that the higher-cost shale might find locking in 2018 production less attractive.
Goldman Sachs has also recently said that OPEC cuts would push the oil market into deficit in the first quarter, which in turn would move the market into backwardation by the summer months.
However, U.S. shale production is also expected to respond to higher oil prices, so there is a “limited upside” in crude prices above the high-$50s, Goldman Sachs noted.
The Saudis are said to be leading the way with the oil production cuts, thus far, and others are expected to come online soon.