Goldman Sees Hard Path to OPEC+ Extension for Russia, Saudis

Uncertainty over oil supply and demand fundamentals is making it tougher for Russia and Saudi Arabia — the architects of the OPEC+ deal — to reconcile their differences over the framework for an extension of their output pact into the second half, according to Goldman Sachs Group Inc.

Current demand growth “neither will support exiting the production agreement, nor is bad enough to reinforce more cuts,” Goldman Sachs Head of Commodity Research Jeffrey Currie said in an interview in St. Petersburg. Combined with uncertainty over Iranian exports and growing U.S. shale output, it “becomes increasingly difficult to know what production levels will balance the market.”

As the Organization of Petroleum Exporting Countries and its allies prepare to discuss the output cap in Vienna, oil analysts are weighing the chances of a potential oversupply amid slower demand growth. A weakening in consumption may require the group to extend cuts, a task which Russia may not be ready to sign up to.

U.S. crude inventories typify this supply ambiguity. Stockpiles are currently at the highest level since mid-2017, according to Energy Information Administration data. Government figures set to be published Wednesday will show a 1.25 million-barrel drop, the biggest since early May, according to a Bloomberg survey.

“It’s much easier to unify a position, when there is a supply disruption or a strong demand, then both Russia and Saudi Arabia want to grow production,” Currie said on the sidelines of the St. Petersburg International Economic Forum on Friday. But now “it’s a very middling environment. This makes those tensions between Russia and Saudi Arabia more apparent.”

Saudi Arabia’s Energy Minister Khalid Al-Falih is sure the deal “is almost in the bag” for OPEC and some adjustments may be made for non-OPEC members. Russian Energy Minister Alexander Novak meanwhile has adopted a wait-and-see approach, saying more time is needed and said a unifying position can be developed closer to the OPEC+ meeting.

Novak is being pulled both ways. The nation’s biggest oil producer Rosneft PJSC warned an extension would lead to a loss of market share to the U.S. Meanwhile, Finance Minister Anton Siluanov said any failure to reach a deal could send prices to $40 a barrel — the level used to draft the Russian budget — or even lower.

Saudi Arabia, which has pushed OPEC+ to prolong production cuts, needs about $85 a barrel — well above current levels of just above $63 — to balance its budget this year. Goldman Sachs retains its price outlook at $65 a barrel in the third quarter and $60 for 2020.

In the absence of any further disruption to the oil market in the coming weeks, Saudi Arabia may prevail and the group will rollover the cuts with some flexibility, according to Goldman Sachs. “Although Russia would want to calibrate its production targets going forward, these uncertainties make rolling over the current agreement the easiest with a caveat that shortages would be met,” Currie said.