• World
  • Columnist
  • Commodities
  • WORLD BUSINESS & ECONOMY
  • Executive Knowledge Series
  • Finance
  • Manufacturing
  • Markets
  • Risk & Governance
  • Small Business
  • Technology, Media & Innovation
  • Comments
  • Business AM WebTV
  • Login

Businessamlive
  • FRONTPAGE
  • FINANCE
    • AllAsset ManagementAuditBankingBondBudgetCapital MarketsC&I LeasingCurrencyDealDebt marketForexFund RaisingFundingGovernmentHedge FundsInsuranceInvestmentInvestorInvestor ServicesMergers & AcquistionsMoney marketTreasury BillsMortgagePensionsPersonal financePonziQuantitative EasingshareTaxationTSAWealth Management
      Finance

      Nigeria, Africa remittances on target as Wari, Lycaremit sign partnership

      January 21, 2021

      Companies

      Total Nigeria, Mixta, Valency, list new CPs on FMDQ platform to enhance financial markets development

      January 19, 2021

      Finance

      Amidst N32.22trn public debt, analysts say Nigeria’s external debt service manageable

      January 19, 2021

      Finance

      Stringent regulations, business environment forced Stanbic IBTC out of BDC business

      January 15, 2021

  • MARKETS
  • ECONOMY
    • AllAfricaAgricAirportsAmericaAsiaAustraliaBreakthroughDealEuropeForeign InvestmentsforexGlobal marketGovernanceIMFMiddle EastNECANigeriaOutlookRich listSouth AfricaSport BusinessTradeU.KWest AfricaWorld Economic forum
      Markets

      Nairobi Stock Exchange pushes expansion plans with more listings in 2021, says CEO

      January 23, 2021

      Africa Investment Forum

      Africa’s $60bn losses in illicit capital flows due to multinationals’ tax avoidance, says AfDB Adesina

      January 22, 2021

      Frontpage

      Covid-19 vaccine: Nigeria, 54 others to benefit from African Union’s 270m doses

      January 21, 2021

      Finance

      Nigeria, Africa remittances on target as Wari, Lycaremit sign partnership

      January 21, 2021

  • COMMODITIES
  • ENERGY
    • AllConferenceElectricityOil and GasPowerRenewable
      Companies

      Appeal Court suspends order against shutting of SEPLAT headoffice

      January 23, 2021

      Frontpage

      OPEC welcomes push for electric vehicles, but says fossil fuel remains strong

      January 21, 2021

      National: Governance, Policy & Politics

      Nigeria ramps up domestic LPG consumption above 1MMT, says PPPRA

      January 20, 2021

      Companies

      TIPP Oil, German lubricant maker, targets 2021 Nigeria launch with eco-friendly scheme  

      January 19, 2021

  • TECHNOLOGY
  • MANUFACTURING
  • ANALYSIS
    • Analyst Insight

      CBN meeting and NSE in focus

      January 18, 2021

      Analyst Insight

      Once again, fiscal stimulus takes centre stage

      January 18, 2021

      Analyst Insight

      Organisations must learn from the WhatsApp story  

      January 18, 2021

      Analyst Insight

      Data privacy maturity model in organisations

      January 11, 2021

Frontpage Oil and Gas WORLD BUSINESS & ECONOMY

Goldman Sachs explains why Saudis made shocking oil production cut decision

January 6, 2021451 views0 comments

By Zerohedge.com
The first monthly OPEC+ meeting to decide on the group’s production ended with an unexpected, in fact shocking two-month agreement:
Goldman Sachs explains why Saudis made shocking oil production cut decision
  1. Saudi announced an unexpected and unilateral production cut of 1 mb/d in February and March,
  2. Russia and Kazakhstan will instead increase output modestly to meet seasonal needs while
  3. other producers will remain at their January levels.
Of the three, the Saudi decision to cut production by 1 million barrels came as a shock to the market, sending oil sharply higher.
What has behind it? As Goldman’s commodity strategist Damien Courvalin explains, despite this bullish supply agreement, Saudi’s decision “likely reflects signs of weakening demand as lockdowns return, with our updated 1Q21 balance actually weaker than previously.”
That said, 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 Goldman to reiterate its bullish oil view. As a result, the bank continues to recommend a long Dec-21 Brent trade (currently trading at $52/bbl vs. its $65/bbl forecast) and expect sustained backwardation and lower implied volatility. Courvalin also notes that “fundamentals do matter, but we see the recent recovery in refining margins and product cracks as premature and the best way to express the expected weakness in near-term oil demand.”
Here are more details from the Goldman note:
The most significant decision was Saudi’s pre-emptive measure to reduce output in the face of renewed lockdowns with OPEC+ production now expected below our prior forecast by 1.45 mb/d in February and 1.85 mb/d in March. Saudi’s decision surprised as global demand beat expectations in December on shallower and shorter EU lockdowns and resilient jet demand. Further, by allowing Russia to increase production, Saudi undermined its efforts since April to have every producer implement similar cuts, with the Kingdom solely taking a fiscal hit. Finally, by lifting prices to their highest levels since last March, Saudis risk extending the ongoing recovery in shale production, as WTI spot prices now at $50/bbl can allow for higher activity and positive free cash flows (although such a response would likely take time to materialize with producers cautious of further OPEC surprises).
This, according to Courvalin, leaves a large expected slowdown in global oil demand as the most rational explanation for Saudi’s cut, likely signaled through its term contract to Asian consumers where infections are rising quickly (Korea, Japan, South-East Asia).
Meanwhile, Goldman’s high-frequency indicator of oil demand (or lack thereof) suggests that the return of more aggressive lockdowns is already weighing on demand, and the bank is reflecting these headwinds in its balance, taking down January and February oil demand to 92.5 mb/d from an upward revised December demand level of 93.5 mb/d.
Separately, and from a geopolitical perspective, the transition to a likely less supportive US administration may also have led Saudi to adopt a more supportive stance towards other Middle East producers, as illustrated in both today’s unilateral cut and restoration of ties with Qatar.
As a result of today’s announcement, Goldman’s updated Q1 2021 balance is weaker than previously although, with prospects for a tighter market in 2Q21 as the Saudi announcement hints. This new OPEC+ path and the bank’s demand downgrade lead the bank to forecast a 1Q21 0.25 mb/d surplus vs. a commensurate deficit previously (only half offset by a tighter December). Importantly, OPEC+ March production level will still be low just as global demand starts rebounding sharply driven by warmer weather and rising vaccinations. This points to the group potentially struggling to ramp-up output quickly enough, with estimates currently reflecting a 1.3 mb/d deficit in April-July despite OPEC+ increasing production by 4 mb/d, a historically tall order.
On net, Goldman believes today’s outcome will help support prices in the face of demand risks given Saudi’s commitment to balance the market, and the potential for Saudi to cut more – now that they have tipped their hand – than demand actually disappoints, risks of a tighter 2Q21 balance and a growing consensus bullish outlook for crude fundamentals later this year.
Finally, for those asking, Goldman’s own year-end Brent forecast of $65/bbl is well above market forwards and consensus expectations.
Share on Facebook Tweet Email
PreviousAccess Bank continues African expansion with acquisition of Zambia’s Cavmont Bank
NextOil hits 11-month high as Saudi Arabia, OPEC+ allies negotiate production cut

Leave a comment

- Cancel reply

MARKET DATA

Market Videos

Recent Posts

  • Appeal Court suspends order against shutting of SEPLAT headoffice
  • Eko Atlantic City to utilise local content for economic diversification in Nigeria
  • Nairobi Stock Exchange pushes expansion plans with more listings in 2021, says CEO
  • Africa’s $60bn losses in illicit capital flows due to multinationals’ tax avoidance, says AfDB Adesina
  • Nigeria equities go bearish on selloffs in DangCem, AXA Mansard, UBA

World

Africa

Buhari, Okonjo-Iweala congratulate Adesina over reelection as AfDB President

Europe

EU businesses to cut investments in 2020, says EIB report

America

U.S. increases cost of visa application for Nigerians

Africa

Thatcher-Loving Nigeria Candidate Plans to Overhaul Economy

Africa

AfDB scales up industrialization pace on the continent, delivers improved business access to finance, skills, energy

Frontpage posts

0

Nigeria’s financing agency partners Smarter Grid Int. on renewable energy

Frontpage May 27, 2018

1
2

Bitcoin rebounds above $8,000 after regulators spare tough reprisals

Frontpage February 7, 2018

3

Buhari orders minimum wage committee to fast track negotiations

Frontpage September 11, 2019

4

AfDB probe: Buhari savours Adesina’s victory, congratulates him

Frontpage July 29, 2020

5

Who will fund Rosneft’s $157bn mega oil project?

Energy December 11, 2019

SUPPORT

  • Photo Gallery
  • Help Centre
  • About Us
  • Accessibility

LEGAL & PRIVACY

  • Terms & Conditions
  • Privacy
  • Cookies
  • Copyright

SERVICES

  • Conferences & Events
  • Analysts Research
  • Advertising Rate
  • Ebooks

TOOLS

  • Portfolio
  • Newsletters
  • News feed
  • Currency Converter

SUBSCRIBE

Join us to get latest updates on business related news.

[mc4wp_form id="3076"]
  • ABOUT US
  • CONTACT US
  • CAREERS
  • TERMS & CONDITIONS
  • PRIVACY POLICY
Copyright 2017. All rights reserved. BusinessAMLive. A Businessnewscorp Member Company.