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Even big OPEC++ Cuts Won’t Offset Oil Demand Collapse – Here’s What Analysts Had to Say


OPEC and other major oil producers on Thursday discussed potential big output cuts in the face of a huge fall in demand due to the coronavirus crisis.The Organization of the Petroleum Exporting Countries and other producers including Russia, a group known as OPEC+, began a meeting on Thursday, which was expected include discussion of record cuts equivalent to 10% to 15% of global supplies, although demand has plunged by up to 30%.

Analysts say that, even if such record cuts are agreed, they will not be enough.

The group agreed in principle for a 10 million-barrel-per-day cut for May and June, according to three OPEC+ sources. The group plans for OPEC+ to cut 10 million barrels per day and other nations to cut 5 million barrels, one source told Reuters.

RBC:

Michael Tran, managing director of energy strategy at RBC Capital Markets, said: “The market’s muted price reaction is a sobering indicator of the headwinds that remain, namely demand destruction. An acute near-term surge in crude prices would cripple refining economics and result in further run cuts.”

MORNINGSTAR:

Sandy Fielden, director of oil and products research, said: “Usual expected drama so far. Cuts talk all well and good but ‘Who, what, when and where’ is what actually matters. Plus the G20 role is still a mystery.”

WELLS FARGO:

Roger Read, senior energy analyst, said: “Until the extreme social distancing / economic shutdown measures are significantly relaxed across North America, Europe and parts of Asia, any OPEC+ supply cuts are simply playing catch-up at best.”

BAIRD

Ethan Bellamy, senior analyst, said: “10 million barrels per day is insufficient to balance the market. … OPEC’s only real choice to bring the U.S. and other higher-cost producers along is to allow price to ration supply. With half a trillion in reserves, we think the Russians can outlast U.S. producers in a fight for market share.”

RYSTAD ENERGY

“If true, the preliminary production cut of 10 million bpd among OPEC+ members is a good first step, but it would still not be enough given the 20 million bpd+ supply overhang expected for the second quarter of 2020.”

GOLDMAN SACHS

“Our updated 2020 global oil balance suggests that a 10 million barrels per day (bpd) headline cut (for an effective 6.5 million bpd cut in production) would not be sufficient, still requiring an additional 4 million bpd of necessary price induced shut-ins.”

MIZUHO

Bob Yawger, Director of Energy Futures, said: “If they cut, it won’t be enough. If they agree to a 10 million barrel (per- day) cut, it will only slow filling of storage. It’s not going to save the day, but it’s better than nothing.”

JP MORGAN

The bank expects OPEC+ to agree to cut 4.3 million bpd. “While clearly not enough to offset the demand drop … (the cut) would materially lessen the risk of storage being filled and offer a smoother route to working off inventories.”

UBS

“The unprecedented decline in demand… means that a successful supply response is just a part-mitigant in the short term. Even if producers were to agree to an arrangement that results in short term market balance, underlying spare capacity will rise to historic levels.”

INTERNATIONAL ENERGY AGENCY

The head of the International Energy Agency, Fatih Birol, said a production cut of as much as 10 million bpd would still result in a 15 million bpd build up of crude in the second quarter.

BCS GLOBAL MARKETS

Kirill Tachennikov, director and senior oil analyst at BCS Global Markets said: “Even if a 10 million bpd cut is agreed, it is 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. As a result, the challenges of oil storage gradually filling up is still a very real issue.”

OANDA:

“As the OPEC+ virtual meeting kicks off, oil prices extended their gains after reports that Russia and Saudi Arabia have reached a deal on deep oil cuts and that OPEC ++ are talking about cuts as large as 20 million bpd. As is with every OPEC meeting, many plot twists are to be expected.”



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