The Economics Behind OPEC’s Short-Duration Production Cut

Published on01 DEC 2016

OPEC's first production cut in eight years reflects a changed environment for oil producers since the group’s decision two years ago to forego attempts to push prices higher. With a rebalanced oil market already “in the line of sight” for 2017 thanks to higher demand and restraints on supply, Goldman Sachs’ Jeff Currie sees OPEC’s short-duration cut supported by compelling economics. He explains how the focus on drawing down inventories should reduce price volatility and may create an unusual phenomenon in the market called "backwardation,” reinforcing the lower-for-longer New Oil Order.   

By drawing down inventories and shifting the forward curve into a level of backwardation…you take away that ability for higher-cost producers to hedge.

- Jeff Currie

Jeff Currie
Global Head of Commodities Research, Goldman Sachs