Investment bank Goldman Sachs has said upcoming crude oil production cuts by OPEC could result in a significantly larger deficit in the market, according to Reuters.
On Sunday OPEC+, which groups OPEC with Russia and other allies, agreed to widen oil supply cuts to 3.66 million barrels per day (bpd). This in turn raised prices to over $86 per barrel.
Goldman Sachs told Reuters that it sees “elevated OPEC pricing power – the ability to raise prices without significantly hurting its demand – as the key economic driver.” The bank estimates that the production cut will raise OPEC+ revenues as the boost to prices more than offsets the drop in volumes.
A market deficit caused by cuts could drive a surge in prices to $100 per barrel by April 2024, as well as raise OPEC’s pricing power.
The bank also said that it expects an almost 90% implementation rate for the 1.16 million bpd production cut plan, suggesting that countries who announced additional cuts have a strong compliance track record.
Goldman Sachs also reiterated its company view that the market will return to sustained deficits from June onwards due to rapid emerging market growth, a fall in Russian oil supply, and slow US supplies.
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Goldman Sachs’ head of commodities research Jeff Currie said in an interview with CNBC: “OPEC’s pricing power is higher than it has ever been. They are going to continue to exercise that power.” He explained that this is a result of “underinvestment in non-OPEC as well as the shale patch.”
“This is a revenue maximising decision for OPEC under all the different scenarios,” he added.
At 14:30 GMT on Tuesday, Brent Crude futures were trading at approximately $85per barrel. Goldman Sachs on Monday raised its price forecast for Brent for December 2023 by $5, from $90 to $95 per barrel.