The extension of the OPEC/non-OPEC production cut pact through to the end of 2018, and especially the fact that the cartel and allies included an option to review progress in June, reduces the risk of both sudden supply surges and excessive drawdowns, Goldman Sachs says, noting that investor anxiety is higher than it should be.
The lowered risk of sudden sharp movements in supply and inventory drops “leads us to reiterate our view that long-dated implied volatility remains too rich,” Goldman Sachs analysts including Damien Courvalin and Jeffrey Currie said in a report dated November 30, as carried by Bloomberg.
It was none other than Goldman Sachs that warned just two days before OPEC’s crucial meeting that the outcome was uncertain, heightening oil market volatility further. In a research note, the bank said that there was no consensus among the participants in the deal about its extension, and there were signs of an acceleration in the rebalancing of supply and demand, which could dampen motivation to stick to the cuts.
After months of speculation and conflicting comments and hints from various oil officials, OPEC and the Russia-led non-OPEC producers part of the deal agreed on Thursday to continue restricting production through the end of 2018, as expected. But the partners also included the phrasing:
“In view of the uncertainties associated mainly with supply and, to some extent, demand growth it is intended that in June 2018, the opportunity of further adjustment actions will be considered based on prevailing market conditions and the progress achieved towards re-balancing of the oil market at that time.”
According to Bloomberg’s Javier Blas and Jack Farchy, the ‘easy smooth’ meeting and the OPEC ‘win’ in extending the pact until 2018 is just on the surface, while the tough job has been left for next year when the cartel and friends have to start serious talks on an exit strategy.