An unprecedented Easter Sunday OPEC+ accord to slash nearly 10 million barrels per day from the global oil market is “too little and too late,” analysts say.
That is because the cuts – led by Saudi Arabia and Russia, the world’s second and third-largest producers – are dwarfed by approximately double the loss in global demand.
“No voluntary cuts could be large enough to offset the 19m b/d (19 million barrels per day) average April-May demand loss due to the coronavirus,” said Goldman Sachs.
“Today’s agreement leaves the voluntary cuts as still too little and too late,” the firm said in a note on Sunday.
The OPEC+ cuts are essentially a climbdown from the hyper-production levels of the past month, during which Saudi Arabia flooded the market in a showdown with Russia. That flood of oil coincided with Covid-19 reaching pandemic status, obliterating global demand.
Given the “ongoing surge” of production from Saudi Arabia and its allies the UAE and Kuwait, the touted headline deal, Goldman Sachs writes, actually represents a less impressive 7.2 million bpd cut from Q1 levels.
Factor in the less-than-stellar 35% compliance rate outside the core OPEC member states, and it is clear the voluntary cuts would need to go much further to make a dent, the firm said.
The cementing of the OPEC+ accord briefly boosted crude – from about US$22 to nearly $24.50 per barrel Sunday night – only to see them sink back to about $23 Monday morning.
“The market will rally. Only for it to crash again in a few days once the market fully digests that the issue is not supply induced,” a Gulf-based economist predicted to Asia Times last week.
Ignoring the skepticism, the OPEC Secretariat hailed the Easter Sunday accord as “historic.”
“We are witnessing today the triumph of international cooperation and multilateralism which are the core of OPEC values,” said cartel chief Mohammad Barkindo.
But as Goldman Sachs warns, crude prices are likely to decline once again in the coming weeks, as supplies exceed global storage and the world continues to stay home.
The scale of the Covid-19 slowdown has led to calls from as far away as Texas for production cuts and stabilization measures.
“One tool the state has at its disposal is the idea of curbing production known as proration,” wrote Austin-based Parsley Energy CEO Matt Gallagher in a March 29 op-ed for the Houston Chronicle.
He has insisted his company is willing to cut production if others do the same.
Gallagher had also argued for the Saudi and Russian ramp-up of production in the face of a global pandemic to be “investigated.”
There is little to investigate in the case of Moscow, whose rejection of deeper production cuts one month ago was motivated by its desire to compete with US shale.
But for Riyadh, a close ally of the Trump administration, there was significant pressure to assuage Republican lawmakers and constituents in an election year.
The oil war will likely pick up again, analysts predict, when the Covid-19 slowdown subsides.