Goldman warns of $40 crude if OPEC deal fails

By Ovunc Kutlu

NEW YORK (AA) - Oil prices could fall to $40 if OPEC fails to limit its production quota, Goldman Sachs has warned in a report.

"The lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30," the bank said late Monday.

OPEC announced in September at an unofficial meeting in Algeria that it is planning to limit its output to 32.5 to 33 million barrels per day (bpd) -- its first attempt to stabilize the market since mid-2014 when prices began plummeting.

Since that announcement, crude prices have reached $53 a barrel -- the highest level in 15 months.

The organization's biggest producer, Saudi Arabia, along with the UAE, Qatar and Kuwait, welcomed the deal.

A group of members, however, such as Iran, Iraq, Libya and Nigeria asked to be exempt from the deal due to past sanctions, internal strife limiting output and the need for revenue to fight Daesh militants.

"Saudi Arabia and its Gulf OPEC allies -- Kuwait, the United Arab Emirates, Qatar -- proposed last week to cut 4.0 percent from their peak output levels," Goldman said.

The success of the deal also depends on non-OPEC countries limiting their individual output levels.

Non-OPEC producers Brazil, Kazakhstan and Russia, however, recently suggested they are "not yet willing to freeze output at current production levels," according to Goldman.

OPEC produced an average of 34.2 mbpd of crude in October. With the proposed 4 percent cut from each of the four Gulf members, it would cut the cartel's total output to 33.6 mbpd.

But that amount is still problematic.

"Libya, Nigeria, Iran and Iraq are targeting another 0.6 mbpd increase from current production. Further, Russia is ramping up production faster than we had expected,” according to Goldman. “Aggregate OPEC and Russia would reach 45.9 mbpd, 0.7 mbpd above our 2017 base case," it added.