Saudi Arabia’s unexpected major oil production cut announced on Tuesday is likely a sign that the world’s largest oil exporter expects oil demand to weaken in coming weeks due to the renewed strict lockdowns in major economies, Goldman Sachs says.
After the two-day OPEC+ ministerial meeting reached a compromise on production levels for February—giving Russia and Kazakhstan a combined 75,000 bpd increase in production in February—Saudi Arabia, the biggest producer and de facto leader of OPEC, announced it would voluntarily cut its crude oil production by 1 million barrels per day (bpd) beyond its quota over the next two months.
According to a note from Goldman Sachs, the move from the Saudis is indeed surprising, and while it will support oil prices in the near term, it also signals that the Kingdom expects weakening oil demand in the first quarter of 2021.
“Despite this bullish supply agreement, we believe Saudi’s decision likely reflects signs of weakening demand as lockdowns return,” Goldman Sachs said in the note, as carried by Reuters.
This week, Germany and Italy extended their respective lockdowns, while England went on Wednesday into its third nationwide lockdown since the pandemic started, with stay-at-home orders and schools closed just like in the first lockdown in March and April. New COVID-19 cases in the UK surpassed 60,000 for the first time on Tuesday.
The stricter measures to fight the spread of the coronavirus are likely seen by Saudi Arabia as a sign that oil demand will be very weak at the start of this year, according to Goldman.
Still, the additional cuts from the Saudis are surprising because they undermine the Kingdom’s stance so far that every country in the pact should play their part in supporting market rebalancing with proportionate cuts. In addition, the deep additional reduction in production could encourage U.S. shale to pump more, Goldman Sachs analysts said, according to Bloomberg.
However, the Kingdom could be playing the long game by setting the stage for a tighter oil market in the second quarter of the year.
“Saudi’s action and the prospect for a tight market in 2Q21, as the rebound in demand stresses the ability to restart production, will likely support prices in coming weeks, leading us to reiterate our bullish oil view,” Goldman Sachs said, as carried by Reuters.
Goldman is bullish on oil, seeing Brent Crude averaging $65 in 2021.
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By Tsvetana Paraskova for Oilprice.com
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