Even though oil producers finally agreed to cut production by nearly 10 million bpd, the deal will fail to support oil prices in the coming weeks as the agreement, albeit historic, is falling short of the enormous demand destruction and expectations, according to Goldman Sachs.
The OPEC and non-OPEC producers known as OPEC+ who had managed their oil supply to prop up prices in the past three years put the Saudi-Russia feud behind and forged on Sunday a new collective deal to respond to U.S. pressure and to the glut threatening to fill up global storage within weeks as demand crashed in the COVID-19 pandemic.
Still, while OPEC issued a timetable of cuts that would last through 2022, oil prices were barely up on at 7:50 a.m. EDT on Monday, with , erasing earlier gains of 5% as the market seems to look at the deal as 'too little, too late' as global oil demand tumbles by 20-30 million bpd.
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.
"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.
"While 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, 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.