Interview: Global cut won't be enough to balance oil market: Goldman's Currie

A globally coordinated oil production cut is "likely" but would fail to deliver the kind of reduction needed to balance the crude market, Goldman Sachs' global head of commodities Jeff Currie said in an interview with S&P Global Platts Tuesday.

"It's too little, too late," Currie said about a possible coordinated cut between OPEC, Russia and various others, potentially including countries like Brazil and Norway.

"If they get an agreement to cut say 10-15 million b/d, it is still not sufficient," the commodities expert said, given that demand is down 26 million b/d.

OPEC, Russia and nine other allies plan a meeting on Thursday to work out production cuts that could take as much as 10%-15% of crude supply off the market, though delegates have said commitments for a deal have yet to be clinched.

INTERVIEW: World set for long term oil demand destruction from coronavirus, Goldman's Currie says

That is set to be followed by an extraordinary meeting of energy minsters from the G20 group of leading world economies on Friday to discuss how these plans can fit with a possible global crude production cut accord aimed at shoring up an oil market obliterated by the coronavirus pandemic.

"More importantly, that cut won't be implemented for another 4-6 weeks in terms of impacting the market, at which point if you use the Wuhan prototype, demand may already be in a recovery by the time we get to June," he added, referring to the lifting of the lockdown in the Chinese city where the outbreak started.

Currie said that there is likely to be a mix of forced shut-ins due to low oil prices and coordinated production cuts. The US is set to let the market determine production curtailments due to the fact US companies cannot collude with foreign entities without falling foul of antitrust rules.

Currie reiterated his view that the hardest-hit producers are likely to be the US, Russia and Canada, in part because of their large production base but also due to their reliance on onshore, "landlocked" producing assets and exposure to lower-margin fields.

S&P Global Platts Analytics also notes that with the US being the largest oil producer at around 13 million b/d, it will likely have to contribute the most as its crude would have no place to go when storage reaches capacity and refineries cut runs.

"The only outlet on the demand side is strategic petroleum reserves. In the US there is 70 million barrels, of which 30 million is already leased out... China has 100 million barrels," Currie also said, pointing out that Europe, Japan and others don't need more oil for "a rainy day."

Currie also questioned how motivated G20 energy ministers would be to provide assistance, given that many of the countries are net consumers that benefit from lower oil prices, noting this also applies to the US.

THE SHAPE OF RECOVERY

Currie went on to say that once the world starts to emerge from the pandemic, the recovery paths of demand and supply are likely to be different, with demand bouncing back faster than supply.

"When you shut in oil production it takes time to bring it back online. We don't know what happens if we have to shut in a bunch of shale oil, you may have to refrack a good portion of that, or in older smaller mature reservoirs you can do permanent damage," Currie said.

"The supply story is likely to be L-shaped and the demand story is likely to be V-shaped because for demand to recover we just need to get in to our cars," he added.

Goldman Sachs predicts Brent crude will fall to $20 a barrel in the near term and start to rebalance into 2021 with a price target of $55/b next year.

The bank believes that the world could lose as much as 5 million b/d of oil supply capacity over the coming months as damage to the capital stock of the upstream sector accumulates. Suspended wells in late-life fields pumping heavy or other low margin crude are most at risk of being permanently shut, it predicts.

Currie also added that US shale will make a comeback regardless, arguing that you can bankrupt a company but not a commodity.