Goldman Sachs Warns the Saudis: "US Shale Will Respond"

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Even if OPEC and non-OPEC producers deliver the promised cuts and oil spikes to US$60, a recovering US shale production would drag crude prices back to US$55, and the Saudis would be wrong to underestimate an American shale rebound next year, Goldman Sachs said in a report on Sunday.

Oil at US$55 is the bank’s forecast for the first half of 2017, Bloomberg reports, citing parts of the report.

The first half next year is the period in which OPEC and 11 non-OPEC nations promised to cut supply by almost 1.8 million bpd - 1.2 million bpd from the cartel and another 558,000 bpd from non-OPEC producers, including Russia.

Read Robert Rapier: OPEC Aiming for $70 Oil

Commenting on Saturday’s OPEC-NOPEC deal, Goldman analysts opined that greater than expected compliance or the Saudi pledge to make deeper cuts than they had already signed up for are two upside risks to the bank’s oil price forecast.

“We disagree however with Saturday’s comment by Saudi’s energy minister that shale would not respond in 2017,” Goldman Sachs said.

Last week, the number of oil and gas rigs in the United States was up again, with a massive increase of 27 rigs. Active oil rigs in the United States increased by 21 in the week to December 9, while the number of gas rigs increased by 6. The 21-rig increase this week represents the highest spike in the number of active oil rigs in the United States since July 2015.

The US has been steadily bringing new oil rigs online since late June 2016, well before the Algiers meeting where OPEC agreed to agree on a production cut at a later date.

As the current rig count stands, Goldman sees US shale production already on track to increase quarter-on-quarter in the first quarter next year. With West Texas Intermediate crude at US$55, US producers could be able to achieve an 800,000-bpd yearly growth in output “with limited outspend of cash flow and declining leverage”, according to Goldman analysts.

The US supply increase as well as “the resumption of OPEC and Russia production growth once inventories have normalized will further keep the market balance in 2018, even under our optimistic demand forecast, capping the medium term upside to oil prices,” the analysts said, as quoted by Bloomberg.

By Tsvetana Paraskova for Oilprice.com

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