Goldman Sachs analysts: OPEC likely to extend cuts in June

Goldman Sachs analysts said Thursday they no longer expect OPEC+ to partially reverse recent voluntary production cuts in June.

Instead, the Wall Street giant now predicts that Saudi Arabia's crude oil supply will remain steady at 9 million barrels per day in July, compared to their earlier estimate of 9.2 million barrels per day.

Goldman analysts cited three main reasons behind the shift in their expectations.

First, recent inventory data has exceeded expectations, leading the model to estimate only a 37% likelihood of a production increase in June.

Second, recent compliance data on production cuts indicates that extending Saudi Arabia’s 1 million barrel per day reduction, as part of the broader 2.2 million barrel per day cut, would enhance the country's short-term oil profits.

Lastly, elevated interest rates have heightened the importance of these short-term profits to fund Saudi Arabia's ambitious investment plans, analysts noted.

“However, high spare capacity implies that an announcement of a modest increase in targeted production remains plausible,” they wrote.

“Following a recent UAE announcement about increased capacity, we have nudged up our May 2024 estimate of global spare capacity to 6.5mb/d (vs. 6.2mb/d),” analysts added.

Goldman Sachs views the mechanical effect of reduced OPEC+ production as positive for spot oil prices compared to long-dated prices. However, they continue to project that Brent crude will average $82 per barrel in 2025, saying that OPEC’s decision represents a response to bearish inventory levels and that high spare capacity will limit long-dated oil prices.

The firm’s analysts also maintain that Brent crude is likely to stay within a $75 to $90 range in most scenarios.

“We see geopolitical impediments to OPEC’s ability to deploy spare capacity as the key upside tail risk to oil prices while potentially negative effects of high spare capacity on OPEC cohesion pose some downside tail risks,” they said.