Morgan Stanely & Goldman Sachs Both Think OPEC Oil Production Cuts Are Fairytales

Global oil remained under pressure after shedding 3 percent on Monday and more than 1 percent early on Tuesday. Prices retreated from two-month highs on worries about burgeoning Chinese fuel exports, more Iraqi and Nigerian crude shipments and a rising U.S. oil rig count. WTI oil prices are trading at 47.02 and Brent oil is down 12 cents at 48.86.

Oil prices began to reverse gains on Monday after Iraq reported plans to increase crude exports by about 5 percent in the next few days after resuming shipments from three northern oil fields.

Officials in Kirkuk, Iraq’s northern oil center, told Bloomberg News that shipments will increase by about 150,000 barrels a day as exports resume. The three oil fields are operated by the state-run Northern Oil Co., but their export pipeline is controlled by the semi-autonomous Kurdistan Regional Government.

The company had halted exports from those fields in March due to a payment dispute with the Kurdish government. But Iraq’s new oil minister Jabber al-Luaibi last week said he would resolve the dispute, and Prime Minister Haidar Al-Abadi ordered the oil ministry to resume oil pumping into the pipeline.

CNBC reported that oil prices have risen 15 percent since the start of August on speculation of a reduction in output by OPEC members as well the weakening of the greenback that has boosted demand for oil, which is traded internationally in dollars.

Still, the investment bank reckons that the recovery remains fragile due to signs that disruptions in Nigeria, Iraq and Libya are easing.

“While oil prices have rebounded sharply since August 1, we believe this move has not been driven by incrementally better oil fundamentals, but instead by headlines around a potential output freeze as well as a sharp weakening of the dollar,” Goldman analysts wrote.

Goldman is sticking to its forecast of $45-$50 per barrel forecast for Brent crude oil though next summer.

Speculators got all excited last week on hints of a freeze deal among major oil producers, but anyone hoping for coordinated action to boost the struggling oil market is bound for disappointment, according to Morgan Stanley. In a note strategists led by head of energy commodity research Adam Longson warned that an output agreement between members of the Organization of the Petroleum Exporting Countries remains “highly unlikely” as the cartel members battle for market share.

With the increase in production by Iraq and Iran as well as US shale producers as the rig count continues to climb even a positive outcome from the OPEC meeting would have limited effects on global production.  The idea of a production freeze was also pitched earlier in the year, but was quashed at a highly anticipated meeting in Doha, Qatar, in April when Iran refused to get onboard with the plan. The Middle East nation was in the midst of ramping up production and exports after international sanctions were lifted in January following a nuclear deal with the U.S.

However, even if the cartel — against Morgan Stanley’s expectations — is successful in sealing a deal this time, it won’t provide much of a boost for oil prices, the bank said.