Goldman Sachs: Steep oil cuts won't reverse the oil price meltdown - Business Insider

A coalition of oil-producing countries known as OPEC Plus met Thursday to discuss paring back production as demand collapses in the wake of the coronavirus pandemic. The group outlined a deal to cut production by 10 million barrels per day in an effort to buoy the price of oil. But even a cut on that scale — amounting to 10% of global supply — won't be enough to reverse the downward trend in prices, Goldman Sachs said in a report published Thursday morning. The bank expects “a gradual recovery” in Brent prices, reaching $40 per barrel by no earlier than October, at which point it says inventories will start to wind down. Visit Business Insider's homepage for more stories.

The coronavirus pandemic has cratered demand for gasoline and jet fuel, causing the price of oil to collapse in March by as much as 65%. As a result, many oil and gas companies have been forced to layoff staff, slash capital spending, and close wells. But on Thursday, a coalition of oil-producing countries led by Saudi Arabia and Russia known as OPEC Plus met by video conference to discuss paring back production.The talks resulted in an outline of a deal to cut production by 10 million barrels per day (bpd), according to Bloomberg, or about 10% of global supply. Goldman Sachs expects those cuts to start on May 1. Ten million barrels in cuts sounds like great news for an industry reeling from a demand slump. But in a report published this morning, Goldman Sachs says even a cut on that scale will do little to prevent the price of oil from plunging further into the ground.In fact, the bank says the price of US crude will likely fall below $20 a barrel.

“While the prospect of a deal can support prices near current levels in coming days, we believe this support will soon give way to lower prices,” a group of Goldman Sachs analysts led by Damien Courvalin wrote on Thursday.Courvalin projects that the price of Brent crude, the international benchmark, will dip below its current level — around $33 today — and gradually recover to about $40 a barrel in October “as inventories start to wind down.” Brent was about $65 a barrel at the start of the year. Click here to subscribe to Power Line, Business Insider's weekly energy newsletter.

Saudia Arabia's state-run oil company, Saudi Aramco, will likely make some of the biggest cuts to production.

REUTERS/Ahmed Jadallah

'Too little too late'Stay-at-home ordinances to prevent the spread of the novel coronavirus have cratered demand for oil-based fuels, such as gasoline. This month, Goldman Sachs strategists estimate that daily demand will fall by 22 million barrels — a little more than what the entire US consumed last year.Next month, the bank expects a smaller but still substantial drop of 16 million bpd.

Read more: The meltdown in oil prices could soon see some producers actually paying people to take their oil. Here's how that could play out.This shock to demand is unprecedented, and it will be difficult to counter — even with large production cuts, according to the note. This is especially true for landlocked crude that has to travel by pipeline to reach a broader market. “Because of the already occurring demand collapse, a coordinated response is therefore likely to be too little too late for inland crude markets, especially in North America, leaving local prices to have to retrace their recent gains,” Courvalin wrote in a note published last week.Companies will be forced to shut-in wellsCore OPEC members including Saudi Arabia will likely cut their production levels by about 5 million bpd, the analyst said, relative to April levels.Meanwhile, the bank estimates that Russia and Canada will each trim around 1 million bpd, the US will cut 1.5 million bpd, and the remaining OPEC Plus producers and “a handful of new participants” will together cut an additional 1.5 million bpd.

Altogether, the production cut would total 10 million bpd, Courvalin said. He added that even a cut on that scale means that about 4 million bpd of supply “in excess of available storage capacity in both April and May” would have to be shut-in — in other words, companies would still have to shut down their wells and stop producing oil. As local storage fills up, Courvalin said the price oil will fall back below the cost of production for many producers. “Assuming that a deal is reached — our base case now — the key question will be whether its size and timing will improve global oil balances sufficiently to support prices above current levels,” Courvalin said. “This is key, as a cut that would prove too little too late would lead to storage saturation and additional necessary production shut-in, with distressed producers driving physical crude prices and spot oil prices sharply lower.”