Goldman sees OPEC meeting down to the wire with 30% chance of deal

By Dan Murtaugh on 11/29/2016

NEW YORK (Bloomberg) -- The oil market is pricing in a 30% chance of producers reaching a deal to cut output at OPEC’s meeting in Vienna, according to Goldman Sachs Group.

Global benchmark Brent crude may swing $6/bbl on Wednesday, based on implied volatility for options contracts, analysts including Damien Courvalin and Jeff Currie said in a report Monday. Futures would rally into the low $50s and average $55 over the first half of next year if the group agrees to a cut, according to the bank. Failure to reach an accord would mean prices would average $45/bbl through the summer.

Brent crude for January settlement traded down 0.8% at $47.85/bbl on the London-based ICE Futures Europe exchange by 6:37 a.m. local time.

The difference between front-month futures and contracts five years out usually correlates strongly with global oil inventories in the developed world, according to Courvalin and Currie. Based on that, as well as projections for demand and non-OPEC output, Goldman estimates OPEC production for the first half of 2017 will be higher than the level ministers are seeking to cut to. The projected difference signals that the market is pricing in a 30% chance of a reduction being agreed upon, the analysts wrote.

The options market also shows that a move below $40 would be “difficult to sustain” in the event that the group fails to reach a deal, Goldman said. “Price risk is likely skewed to the upside heading into Wednesday,” Courvalin and Currie wrote. “Ultimately, even in the absence of a cut, we expect the oil market to move into deficit by the second half of 2017.”

The Organization of Petroleum Exporting Countries is trying to hammer out details of an agreement to cut production for the first time in eight years to between 32.5 MMbopd and 33 MMbopd from a record 34 MMbopd in October. As of Monday, OPEC officials failed to bridge their differences on the plan, with Saudi Arabia saying that output curbs aren’t essential.

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