Goldman Sachs Warns The Saudis: 'U.S. Shale Will Respond'

By Tsvetana Paraskova Oil FOXBusiness

A pump jack stands idle in Dewitt County, Texas January 13, 2016. REUTERS/Anna Driver (Copyright Reuters 2016)

Even if OPEC and non-OPEC producers deliver the promised cuts and oil spikes to US $60, a recovering U.S. 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.

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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.

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.

Related: Not So Prolific: U.S. Shale Faces A Reality Check

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The U.S. 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. 

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As the current rig count stands, Goldman sees U.S. shale production already on track to increase quarter-on-quarter in the first quarter next year. With West Texas Intermediate crude at US$55, U.S. 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 U.S. 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.

This article was provided courtesy of Oilprice.com.

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