United States Oil Fund (USO)

[eFinanceMarkets]

Crude +2% as nine-month oil cut deal looks likely but shale output seen rising

U.S. crude oil futures closed 2.1% higher to $48.86/bbl, their highest finish in two weeks, after Saudi Arabian and Russian energy ministers announced support for a nine-month extension to the production cut agreement, but prices eased off earlier highs above $49 after the U.S. Department of Energy forecast that supply will grow by 122K bbl/day next month in U.S. shale plays.

Goldman Sachs analysts say the Russia-Saudi announcement bodes well for agreement from OPEC, "consistent with OPEC’s desire to achieve both price stability and backwardation, which will help to slow the recovery in shale oil production by curtailing the market’s ability to grow future production through forward sales.

[But] compliance needs to remain high, and long-term oil prices need to remain low to prevent shale producers from ramping up investment significantly more."

Goldman's Jeff Currie says talk that OPEC could start defending its market share again to squeeze U.S. producers is the wrong way to look at the situation: "Shale and OPEC are taking on the international oil [producers] that are sitting at the top [of the cost curve]... Shale is OPEC’s friend. It’s really only scalable around $50-$55 a barrel, which means [OPEC producers] have a lot of room in which they can grow production underneath that level."

Goldman sees U.S. crude oil at ~$55/bbl at the end of 2017 and Brent at $57.