As discussed yesterday, while the Joint OPEC/Non-OPEC Ministerial Monitoring Committee meeting on Sunday did not formally recommend an extension to the oil production cuts agreed last year at OPEC's Vienna summit, several OPEC members announced their support for such a move during this weekend's meeting in Kuwait. The Committee is now expected to deliberate such an extension at its April meeting at which point OECD inventories are expected to be well short of the targeted “5-year average levels”, or in fact by the May 25 OPEC/Non-OPEC Minister meeting.

While this suggests that an extension could be formalized and be endorsed by OPEC, one bank believes that such a move would not be prudent, as while it may boost near-term prices, oil could hit a "level at which we believe activity levels will ramp up in most regions, making these extended cuts self-defeating." In other words, should OPEC succumb to pressure to achieve near-term gains, oil would ultimately suffer a bigger drop over the longer term.

As Goldman's Damien Courvalin writes overnight, his "assessment of oil fundamentals and the rationale behind the production cuts do not warrant such an extension barring either a sharp deceleration of demand growth or a sharp rebound in Libya/Nigeria production."

We believe that the rebalancing of the oil market is in fact making progress despite the record high US crude inventories. Further, we forecast that OECD inventories on a days of demand cover will reach their 5-year average level by year-end even with OPEC bringing production back online in 2H17. Ultimately, we believe that the goal of the cuts is to accelerate the draw in OECD inventories but not for inventories to fall too low as this would take prices towards $65/bbl, a level at which we believe activity levels will ramp up in most regions, making these extended cuts self-defeating. While this does not preclude an extension of the cuts from being initially announced in May, such a decision would only exacerbate the backwardation that we project, creating upside risks to our 2H17 $57/bbl Brent forecast but in turn downside risk to our 2018 $58/bbl forecast.

Some more thoughts on why Goldman disagrees with the OPEC/NOPEC committee:

We believe it is beneficial for low cost producers to accelerate the normalization of oil inventories but not target too high a price rebound. Lower inventories imply backwardation – helping low cost producers grow market share by preventing higher cost producers from selling their production forward at a premium. However, oil prices above $60/bbl would prove self defeating in our view given the flattening of the oil cost curve and the unprecedented velocity of the shale supply response. It is useful to understand OPEC’s incentive through the lens of our pricing methodology which compares OECD inventories (as measured vs. OECD demand) to Brent timespreads (Exhibit 5). At the stated 5-year average OECD inventory level target, this relationship would imply a 1-mo to 5-yr backwardation above 20% and, at current 5-year forward Brent prices, spot prices of $65/bbl, a price level where we expect an excessive global drilling response.

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We therefore believe that OPEC should be wary of extending its production cuts unless (1) fundamentals weaken sharply driven by transient headwinds such as a ramp up in Libya or a weakening of global demand, or (2) long term oil prices decline further, limiting the rally in spot prices and the incentive to ramp up activity. Absent such conditions, the larger-than-expected ramp up in US activity and the sooner than expected shift by the oil majors to refocus on growth observed so far this year should ultimately be the incentive for an only short duration cut. While this does not preclude an extension of the cuts from being initially announced in May, such a decision would only exacerbate the backwardation that we project, creating upside risks to our 2H17 $57/bbl Brent forecast but in turn downside risk to our 2018 $58/bbl forecast.

In other words, a golidlocks oil price: not too high to stimulate even more shale production, not too low to once again cripple OPEC's own output. Whether Saudi Arabia will agree will be revealed in a few weeks.

Below are the requisite charts from Goldman, laying out the bank's case for a slow, steady renormalization in supply and demand.

(Click on image to enlarge)

(Click on image to enlarge)