Goldman Sachs and other major global investment banking firms reckon the new deal agreed by some of the world’s biggest oil producers will fail to support oil prices in the coming weeks as the agreement, albeit historic, falls short of the expectations.
In a note titled “A historic yet insufficient cut”, Goldman Sachs said the voluntary cuts from the Organisation of Petroleum Exporting Countries (OPEC) and allies would be too little to counter a nearly 20 million bpd demand loss this month and next.
The global oil deal would translate into just 4.3 million bpd of actual production reduction from Q1 2020 levels, according to Goldman Sachs, assuming that all major OPEC members comply 100 percent and all other producers comply at 50 percent with the agreement.
“In short, and as we have been repeating all along, the 9.7mmb/d production cut is nowhere near enough to offset the plunge in demand which based on various estimates is anywhere between 20 and 36mmb/d,” Goldman Sachs said in the note.
Analysts at Goldman Sachs calculated that “the OPEC+ voluntary cut would only lead to an actual 4.3 mbpd reduction in production from 1Q20 levels” and that “based on our updated oil balances, such OPEC+ voluntary cuts would still require an additional 4.1 mb/d cut in May production at the binding storage capacity constraint”, which means that “at the 35 percent compliance level outside of core-OPEC, the necessary production cuts need would need to be 0.5 mbpd larger”.
After four days of talks and mediation, OPEC and 10 other oil-producing countries (known as OPEC+) reached a historic deal to cut 9.7 million barrels per day (bpd) for two months—May and June – before gradually easing the cuts to meet the challenge of a COVID-19-driven drop in demand.
Still, while OPEC issued a timetable of cuts that would last through 2022, oil prices were barely up at 6pm on Monday, with Brent crude trading at $33, up 1.3 percent, while WTI Crude was up 0.13 percent at $22.79, erasing earlier gains of 5 percent as the market seems to look at the deal as ‘too little, too late’ with global oil demand tumbling by 20-30 million bpd.
“Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million bpd average April-May demand loss due to the coronavirus,” Goldman Sachs said.Other analysts also project that despite the significant OPEC cuts, they would not be enough to rebalance the market.
“[W]hile these cuts are significant, there is still a sizeable surplus expected over the second quarter. Therefore, we still believe that there is downside risk to oil prices from current levels in the short term,” Warren Patterson, ING’s head of commodities strategy, said on Monday.
Moreover, compliance with those new historic cuts will also be an issue, and Saudi Arabia—which has rescued the compliance rate in previous pacts—is unlikely to go the extra mile this time, considering the size of its cuts, Patterson noted.
John Kilduff, managing partner at New York-based Again Capital, said OPEC+ seem to disappoint the market more often than not.
“They needed to move mountains here and they maybe moved a hill,” Kilduff said.
Michel Salden, head of commodities at Switzerland-based Vontobel Asset Management, said “OPEC’s deal did not bring much clarity so far and looks more like an invitation to the G20 energy ministers to agree on a 5 mbpd cut tomorrow which would bring the overall cut in oil output to 15 mbpd”.
Roger Read, senior energy analyst at Wells Fargo, said until the extreme social distancing economic shutdown measures are significantly relaxed across North America, Europe and parts of Asia, OPEC+ supply cuts are simply playing catch-up at best.
Bjornar Tonhaugen, head of oil markets at Rystad Energy, said a 10 million-bpd deal is far lower than what the market needs at the moment and “even that seems to be of a fragile nature, as OPEC+ producers appear to struggle to agree, dragging negotiations longer than expected”.
“9.7 million barrels per day is insufficient to balance the market,” Ethan Bellamy, senior analyst at Baird, an American multinational independent investment bank and financial services, said.
Kirill Tachennikov, director and senior oil analyst at Bcs Global Markets, said it was not technically possible to achieve these numbers in less than a month, and it was not enough to offset current oversupply that is exceeding 20 million bpd as it stands.
