Crude oil rebounded slightly on Tuesday after a crash on Sunday night that sent markets reeling Monday. The crash happened after Saudi Arabia dramatically slashed its prices in response to Russia’s refusal to cut its own output, ruining an OPEC+ deal to lower production amid weak demand due to coronavirus.
Now Goldman Sachs oil strategist Damien Courvalin is predicting crude oil prices will remain low, near $30 per barrel (WTI crude was at $60 per barrel in January), for at least the next six months.
“That’s the time it will take to get rebalancing necessary,” Courvalin told Yahoo Finance, “to reflect what has been an important structural shift, which is the end of the artificial OPEC cut, and a strategy now of gaining market share.”
Russia’s refusal to further cut output marked an ugly breakup between Russia and Saudi, but Russia’s motivation was actually more of a shot at American shale frackers (who benefit from the OPEC+ cuts) than at Saudi.
“If you look at the rhetoric so far, it seems that it’s Saudi vs Russia, but they’re on the same side of what is happening,” Courvalin says. “They’re both low-cost producers with significant spare capacity. In our view, they will both benefit if they continue to gradually grow production.”
In response to Russia’s moves, Saudi on Wednesday directed its oil giant Saudi Aramco to raise production to 13 million barrels per day, up from 9.7 million per day in February.
If any deal is coming between Russia and Saudi Arabia, it would likely be a deal to continue to grow production, Courvalin predicts, rather than “trying to support prices artificially by cutting production again,” which is what OPEC wants them to do.
In other words: In an oil market that was already seeing shrinking demand due to coronavirus, Russia and Saudi Arabia are increasing their output, which causes prices to fall because supply outpaces demand.
“There is nothing U.S. producers can do in the short-term, magnitude-wise, to offset what Saudi is announcing in terms of incremental production,” Courvalin says. “However, a year from now, or even by the end of 2020, the slowdown we’re seeing among higher-cost producers eventually will offset the increase in production from low-cost producers.”
Thanks to the cuts from America and other OPEC nations, oil supply will be slightly lower by the end of 2020, Courvalin says, but prices will be low as well.
And lower prices at the gas pump is not the good news for Americans that you might assume it is. As Brian Kessens of Tortoise Capital Advisors told Yahoo Finance on Tuesday, “Ten years ago, for the broader U.S., that was more beneficial. In today’s environment, where the U.S. is actually the world’s largest crude oil producer, a lot of U.S. industry is very dependent on a healthy oil and gas sector… I’d also add, now in times of the coronavirus, if schools are closed and people are working from home, the benefit of lower oil prices is not necessarily there because we’re not driving our cars as much.”
Daniel Roberts is an editor-at-large at Yahoo Finance and closely covers sports business. Follow him on Twitter at @readDanwrite.
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