The oil market could see a record surplus of about 6 million barrels per day (bpd) by next month, considering a bigger-than-expected surge in low-cost output, while a slump in demand was “increasingly broad” triggered by the coronavirus outbreak, Goldman Sachs said on Thursday.
Brent crude was set for its biggest weekly loss since 2008, as oil prices plummeted this week after top producer Saudi Arabia slashed its selling prices amid a price dispute with Russia and pledged to unleash more supply onto a market already reeling from falling demand due to the virus.
“The high-cost producer response at our second quarter 2020 [US]$30 [per barrel] Brent forecast will not be sufficiently fast to offset the record large inventory builds set to occur in coming months,” the Wall Street bank said in a note.
The jump in inventories could also force some inland high-cost producers to shut production, since storage logistics might be stretched, the bank’s analysts added.
While all production limits have been scrapped due to the collapse of the OPEC+ deal, prompting Riyadh and the United Arab Emirates to say they would both ramp up output to record levels, the top producers also promised to expand capacity, suggesting a longer term strategy to win market share from US companies and other producers.
The bank pegged the demand loss due to the fast-spreading COVID-19 outbreak at about 4.5 million bpd, but it also pointed to some signs of improving Chinese oil demand.
The accumulation of oil inventories over the next six months could be similar to a build up over 18 months in 2014 to 2016, it said.
Global demand growth, on the other hand, would see a reduction of about 310,000bpd next year and comfortably offset any fast supply response from high cost producers, especially with the shale output now forecast to drop by 900,000bpd in the first quarter of next year, the bank added.
“Finally, any potential re-escalation of geopolitical tensions in the Middle East would not prevent the bearish pressure of quickly accumulating inventories unless it led to a historically large outage,” it said.
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