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Oil Plunges As Saudi Deal "Nowhere Near Enough"; Goldman Now Expects WTI To Drop Back To $20 | Zero Hedge 4/10/20, 12:33 AM
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Oil Plunges As Saudi Deal "Nowhere Near Enough";
Goldman Now Expects WTI To Drop Back To $20

by Tyler Durden
Thu, 04/09/2020 - 14:37

Moments ago, we reported that as part of what is the largest production cut deal in history, both Saudi Arabia and
Russia will cut their output by 20%, capping their output to 8.5MM b/d in May and June under the new OPEC+ deal
removing about 5 million barrels. The remaining countries in OPEC+ will contribute another 5 million or so with
Bloomberg reporting that all members of OPEC+ have agreed to cut their output.
The market is unimpressed, though; after rallying as much as 10%, crude has swung to a 7% drop.

The reason: as we noted earlier, in a world where there is as much as 35MM b/d in less demand, the 10MMb/d
production cut is, as Bloomberg puts it, "nowhere near enough."

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 Health Amena Bakr
@Amena__Bakr
Markets
Oil Plunges As Saudi Deal "Nowhere Near Enough"; Goldman Now Expects WTI To Drop Back To $20 | Zero Hedge 4/10/20, 12:33 AM

Personal Finance Kazakhstsan, Brunei and Mexico consulting with their

governments on their base line... they are not happy #OOTT
Political
160 9:38 PM - Apr 9, 2020
Technology
72 people are talking about this

And just when everyone thought there is a deal, an energy reporter notes that "the drama continues.... the smaller
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producers are holding up the deal now!"

Amena Bakr
@Amena__Bakr

The drama continues.... the smaller producers are holding up

the deal now! #OOTT
240 9:41 PM - Apr 9, 2020

112 people are talking about this

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Assuming there is a deal, what happens to oil next?

Well, according to Goldman which predicted precisely this outcome - namely a 10mmb/d production cut today -
WTI is headed back to $20. For those who missed it yesterday, here again is the summary:

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Daneric's Elliott Waves Our updated 2020 global oil balance suggests that a 10 mb/d headline cut (for an effective
Dr. Housing Bubble
6.5 mb/d cut in production) would not be sufficient, still requiring an additional 4 mb/d of
Financial Revolutionist
ForexLive necessary price induced shut-ins. While this argues for a larger headline cut of close to 15
Fundist mb/d, we believe this would be much harder to achieve, since the incremental burden
Gains Pains & Capital would likely need to fall on Saudi Arabia to be effective. Further, our price modeling
Gefira
suggests that Brent prices near $35/bbl already reflect such an outcome, with last week’s
Gold Core
Guerrilla Capitalism
rally having brought crude prices to levels that likely slow the large-scale US production
Hedge Accordingly drop that are necessary to a deal in the first place.
Implode-Explode
Investing Contrarian Net, while the prospect of a deal can support prices in coming days, we believe this
Jesse's Cafe Americain support will soon give way to lower prices with downside risk to our near-term WTI

https://www.zerohedge.com/energy/oil-plunges-saudi-deal-nowhere-near-enough-goldman-now-expects-wti-drop-back-20 Page 2 of 7
 TF Metals Report
The Automatic Earth
The Burning Platform
Oil Plunges As Saudi Deal "Nowhere Near Enough"; Goldman Now Expects WTI To Drop Back To $20 | Zero Hedge 4/10/20, 12:33 AM
The Economic Populist
The Saker
Themis Trading
True Sinews
Value Walk
Wolf Street

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. 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. Our updated 2020 global oil balance
suggests that a 10 mb/d headline cut would not be sufficient, still requiring necessary price
induced shut-ins on top of such voluntary curtailments.

To come to this conclusion, we update and refine our 2020 global oil balance (we provide a
full breakdown of this analysis in Section 2 of this report). First, we once again slightly
lower our demand expectations as isolation policies get deployed in a still growing number
of countries and with their lift date increasingly pushed back. We now expect a hit to
April/May/June global oil demand of 22/16/9 mb/d (19/12/6 mb/d previously). Second, we
introduce an estimate of peak monthly storage fill capacity, which starting from current
stock levels is of 17 mb/d in April (with 20 mb/d likely achieve last week[3]), 13 mb/d in
May and only 5 mb/d in June. From a base-case production perspective, we broadly
maintain our last published production forecast from March 17 (which reflected steady
declines in output but did not allocate the necessary shut-in), allowing us to estimate both
the sizes of the voluntary and necessary shut-ins.

While this would simply argue for a larger 15 mb/d "headline" cut (with "effective" supply
reduction of 10 mb/d), we believe it would be much more difficult to pro-actively allocate
an incremental 5 mb/d of voluntary cuts across countries that do not have Saudi’s
geological oilfield flexibility, with the Kingdom's own ability to cut to 8 mb/d likely
challenged. In fact, recent price levels would likely keep US crude prices at levels that
disincentivize the large scale US production drop that backdrop the rationale for the cuts in
the first place. As a result, an 10 mb/d "headline cut" that would still require additional
large but short-lived price-induced cuts is likely the preferred outcome for core-OPEC, as it
ensures the contribution of many producers (and higher OSPs even should Brent prices
return to their lows).

https://www.zerohedge.com/energy/oil-plunges-saudi-deal-nowhere-near-enough-goldman-now-expects-wti-drop-back-20 Page 3 of 7
 Ultimately, the size of the demand shock is simply too large for a coordinated supply cut,
setting the stage for a violent rebalancing (see Top of Mind - Oil's Seismic Shock page 9).
LookingNow
Oil Plunges As Saudi Deal "Nowhere Near Enough"; Goldman forward,
Expectsour
WTIbase-case remains
To Drop Back To $20unchanged,
| Zero Hedgewith a shift to a deficit by July and a 12:33 AM
4/10/20,
gradual recovery in Brent prices (from lower levels than currently) to $40/bbl by October as
inventories start to wind down. The path of the demand recovery will be of course essential
to how this price recovery plays out. But after such a violent rebalancing, supply cuts will
matter increasingly and could create upside price risks later this year.
It will take time to restart the 10.5 mb/d of shut-in wells (6.5 mb/d voluntarily and 4 mb/d
out of necessity) which could also lead to permanently lost productive capacity. For
example, if we assume (1) a recovery in OPEC/Russia production through 3Q-4Q20 back to
1Q20 levels, (2) that production declines expected outside of shut-ins (due to lower capex
and decline rates) don’t reverse and (3) that 1 mb/d of the remaining production cuts take
at least a year to return online, our oil balance would feature fully normalized inventory
levels by early 2021 and point to Brent prices at $55/bbl. While such a rally could be
delayed by a faster unwind of the cuts, it does illustrate that the violent rebalancing we
expect in coming weeks can set the stage for a potential large price recovery later this year.

After all that, it appears that oil trading algos have finally had time to google supply and demand, and what was a
12% gain earlier in the session ended up a 9% loss.

20937 ! 103 !

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