This weekend’s emergency OPEC+ teleconference meeting that saw the 23-member alliance agree to slash production by almost 10 million b/d is regarded as insufficient by several large banks, who say it is unlikely to balance the market.
On Sunday, members of the alliance agreed to collectively cut production by 9.7 million b/d in May and June, followed by an 7.7 million b/d reduction in the second half of 2020 and 5.8 million b/d from January 1, 2021 through April 30, 2022, in a landmark deal aimed at counteracting the plummet in global demand caused by the coronavirus pandemic.
In its analysis, Goldman Sachs said it was assuming almost full compliance on the cuts from core OPEC members and 50% from other participants, which it argued would lead to an overall cut of 4.3 million b/d from the production levels from the first quarter of 2020. An additional 4.1 million b/d in cuts would be needed to balance the market in May under this assumption, it said. The additional 3.7 million b/d of cuts pledged by the US, Canada and Brazil are likely to occur over a period of time and be due to market forces rather than voluntary cuts, it added.
The fact that OPEC Secretary General Mohammed Barkindo stated there could be a 14.7 million b/d excess in the second quarter, which would be 5 million b/d higher than OPEC+’s headline production cut commitment of 9.7 million b/d, demonstrates that the agreement will not balance the market, the analysts added.
“Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million b/d average April-May demand loss due to the coronavirus,” Goldman Sachs said. “We therefore reiterate our view that [US] inland crude prices will decline further in the coming weeks as storage becomes saturated.”
With the output cuts only coming into effect on May 1, some existing global crude storage capacity may be close to filling up even before the deal is implemented, if global production remains high in April, according to a report by Abu Dhabi Commercial Bank (ADCB).
“We expect global inventories to remain abundant and rise in [Q2], with a modest reduction in [H2]. We see crude prices remaining broadly around current levels until global demand picks up,” said Monica Malek, chief economist at ADCB. “Based on the production levels outlined in the OPEC+ agreement, we estimate that Saudi Arabia’s oil sector will contract by c. 6.1% in 2020, with the UAE’s [contracting] by c. 5.6%.”
Several banks have said they expect Brent crude prices to test $20/b in the short term, before the additional cuts are implemented in May.
Starting in May, prices could bounce back and end the first half of the year at $32/b, as the impact of the pandemic slowly ebbs out of the market and the ballooning oversupply begins to ease, said Ehsan Khoman, director, head of MENA research and strategy at Mitsubishi UFG Financial Group (MUFG).
“It remains to be seen by how much US production will fall in actual terms in the coming months; this will be one of the critical factors for any stabilization in oil market conditions in 2020,” added Khoman. “The prospects of a sustained rally are vanishingly slim, in our view.”