Without additional oil production cuts by OPEC in 2020, Rystad Energy forecasts a substantial build of global crude stocks and a corresponding drop in oil prices.
A showdown is taking place in Vienna as OPEC countries plus Russia will gather in the Austrian capital on December 5-6 to discuss oil output levels in 2020.
“We have a clear message to the OPEC+ countries: A ‘roll-over’ of the current production agreement is not enough to preserve a balanced market and ensure a stable oil price environment in 2020,” said Bjørnar Tonhaugen, head of oil market research at Rystad Energy. “The outlook will be bleak if OPEC+ fails to agree on additional cuts.”
According to Rystad Energy’s estimates, the global oil market will be fundamentally oversupplied to the tune of 0.8 million b/d in the first half of 2020.
Empirical evidence has demonstrated that a 1 million b/d surplus of oil can be expected to cause an oil price decline of around 5percent per month, implying a potential drop of 30percent over 6 months.
“If OPEC and Russia don’t extend and deepen their cuts, we could see Brent Blend dip to the $40s next year for a shorter period,” Tonhaugen said.
“In order to ensure a balanced market, our research indicates that OPEC would need to reduce crude production to 28.9 million b/d – a drop of 0.8 million b/d from the level seen in the fourth quarter of 2019-levels – given our forecast for demand, non-OPEC supply and the impact of new IMO 2020 regulations on global crude runs,” Tonhaugen added.
New shipping fuel regulations, the so-called IMO 2020 effect, are expected to create more demand for crude oil in the near-term. However, if the actual effect of the IMO rules on crude demand turns out to be zero, the “call on OPEC” – the amount of OPEC oil needed to meet demand – drops by 1.9 million b/d year-on-year to 28.3 million b/d.
“Despite decent cut compliance from the group as a whole and large involuntary declines in Iran and Venezuela this year, OPEC’s current crude production of about 29.7 million b/d is far above the ‘call’ for 2020. Without deeper cuts taking effect in January 2020, large global implied stock builds are on the cards,” Tonhaugen said.
Rystad Energy finds that OPEC+ as a whole has cut oil production by 2.6 million b/d year-to-date, compared to October 2018 reference levels and the cut target of approximately 1.2 million b/d. The additional 1.4 million b/d of “cuts” are owed entirely to involuntary declines from Iran and Venezuela, both of which are exempt from the agreement. Saudi Arabia has led the group’s compliance by cutting 870,000 b/d in 2019, or 2.7 times its target cut of 322,000 b/d.
“Saudi Arabia has signaled that it seeks stricter compliance by other producers and is no longer willing to shoulder the burden of sub-compliance by others, such as Russia, Iraq and Kazakhstan, which have all failed to reach 100% compliance with their target cuts,” Tonhaugen said.
The challenge for OPEC+ is the strong supply growth elsewhere in the world. Rystad Energy forecasts a supply growth of 2.6 million b/d year-on-year in 2020, led by US shale, Norway, and Brazil against weak global demand growth of only 1.0 million b/d year-on-year.
Rystad Energy forecasts that non-OPEC non-US supply will grow 1.2 million b/d year-on-year in 2020, while OPEC estimates this number at 0.6 million b/d year-on-year.