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Goldman Sees Surprise Saudi Cut as Signal Oil Demand to Weaken

Saudi Arabia’s decision to cut oil production probably reflects expectations for demand to weaken further as coronavirus lockdowns return around…

By financial2020myday , in Commodities , at January 6, 2021

Saudi Arabia’s decision to cut oil production probably reflects expectations for demand to weaken further as coronavirus lockdowns return around the world, according to Goldman Sachs Group Inc (NYSE:GS).

The kingdom’s pledge to lower output by 1 million barrels a day in February and March was surprising for several reasons, Goldman analysts including Damien Courvalin and Jeff Currie said in a note dated Jan. 5. These include global demand beating expectations in December, the risk of encouraging the return of more U.S. shale production and Saudi Arabia undermining its own efforts to have every OPEC+ member implement similar cuts, they said.

See also: Saudis Take Charge of Oil Market With Surprise Production Cut

The most likely reason is the kingdom expects a big slowdown in global energy consumption including in Asia where infections are rising quickly, the analysts said. The transition to a probably less friendly U.S. administration may also have led the Saudis to adopt a more supportive stance toward other Middle East producers, they said. Goldman revised its demand forecasts for January and February to 92.5 million barrels a day from 93.5 million in December.

The Saudi output cuts would, however, support prices in the coming weeks, the bank said, as it maintained its year-end Brent forecast of $65 a barrel. The global crude benchmark traded near $54 a barrel in Asia on Wednesday after jumping almost 5% in the previous session.

Goldman said its supply-demand balance for the first quarter is weaker than previously thought and it now sees a 250,000 barrel per day surplus. There are prospects for a tighter market from April to July, however, when it forecasts a 1.3 million barrel deficit.

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