Some of the world’s largest oil producers including Nigeria might have reached a truce the global oil market long sought, but hopes for a significant and sustained rebound in prices might not be visible anytime soon.
Organisation of Petroleum Exporting Countries (OPEC) and allies member reached a tentative agreement to trim oil production by 9.7 million barrels per day (bpd) to help ease the economic impact of the coronavirus crisis on global demand.
Goldman Sachs and other major global investment banking firms believe the new historic deal agreed by some of the world’s biggest oil producer will fail to support oil prices in the coming weeks as the agreement, albeit historic, is falling short of the expectations.
The global oil deal would translate into just 4.3 million bpd of actual production reduction from Q1 2020 levels which still fall short of market expectations, 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 9.7mmbpd 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 Sach said in its note.
“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 market analysts believe even if 10 million bpd worth of production is removed via an agreed output cut, storage levels will still fill up, just at a slower pace.
International Energy Agency (IEA) said this summer the world may still run out of space to store unwanted crude — a worst-case scenario for the oil industry that could push prices even lower.
“In a few years, when we look back at 2020, we may well see that it was the worst year in the history of global oil markets,” IEA Executive Director Fatih Birol said in its monthly report.
Also, Warren Patterson, ING’s Head of Commodities Strategy said compliance with this 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.”
Kirill Tachennikov, director and senior oil analyst at Bcs Global Markets told Reuters it’s not technically possible to achieve these numbers in less than a month, and it is not enough to offset current oversupply that is exceeding 20 million bpd as it stands.
Roger Read, a senior energy analyst at Wells Fargo told CNBC 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.”
Lower oil price means dozens of small independent oil producers are on the brink of bankruptcy while oil-producing countries across the Middle East, Africa and Latin America are bound to face not only economic difficulties, but possibly political turbulence as governments are forced to cut social programs and energy subsidies.
