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Oil production disruptions may be hitting multi-year highs, but Goldman Sachs predicts the resulting price recovery is likely to stall.
"On aggregate, we view the price recovery as fragile," Goldman Sachs said in a commodities research note published Wednesday.
The bank explained that the restart of Canadian production, prospects of a solution to Nigerian outages, larger-than-expected output from OPEC members, and the risk of smaller-than-expected production declines as result of higher crude prices are likely to temper price gains going forward.
A month's worth of wildfires in Canada's oil producing province of Alberta and continued rebel attacks on Nigeria's oil infrastructure helped push up oil prices as disruptions hit multi-year highs, with over 3.5 million barrels per day taken offline in May alone, according to Goldman's data. Weather issues and dwindling funds have also knocked Venezuelan oil production by about 85,000 barrels per day (bpd) year-to-date through to the end of May, it added.
But with Canadian disruptions expected to end by late June, and negotiations between rebels and the Nigerian government underway, the price driving effects of production interruptions could start to dissolve.
"In particular, we expect that the (deficit in the second half of 2016) will remain modest at current prices and that a return into surplus is likely in (the first quarter of 2017) before inventories normalize by end-2017," the note explained.
Goldman added that it continues to expect that oil prices will need to hold between $45 and $50 per barrel in the coming months in order to see a supply deficit in the second half of the year.
In the meantime, upside production surprises are offsetting the rise in disruptions, the bank stated.
OPEC production outside of Venezuela and Nigeria jumped by 225,000 bpd in May, with Iranian up 100,000 bpd, and exports from southern Iraq near record high. Saudi Arabia has also seen output rebound, up 85,000 bpd month-on-month to 10.2 million bpd.
Output is also proving resilient outside of OPEC, with Brazil's state-owned oil giant Petrobras seeing a 6 percent jump in output from April, and loadings from North Sea platforms are expected to skim two-year highs in July.
And while Goldman Sachs expects U.S. production to decline by 430,000 bpd this year, "the industry's focus on cost deflation and productivity gains raises the risk that near current prices, production continues to surprise to the upside."
In other words, with both WTI and Brent prices still hovering around $50 per barrel, companies that had budgeted for lower prices may be enticed to ramp up production. Some Canadian producers, for example, had budgeted for oil at $35 per barrel this year, Goldman Sachs explained.
But with further disruptions across Nigeria and Venezuela still a possibility, Goldman predicts a relatively flat outlook for oil.
"As of today, we view the odds of both sets of risks to our forecast as relatively balanced," the note explained.