New
outlook by international observers has shown that a substantial build
of global crude stocks and a corresponding drop in oil prices is
imminent if additional oil production cuts by OPEC in 2020, is not
followed by OPEC+.
Empirical evidence has demonstrated that a 1 million bpd surplus of
oil can be expected to cause an oil price decline of around 5% per
month, implying a potential drop of 30% over six months.
According to Rystad Energy’s estimates, the global oil market will be
fundamentally oversupplied to the tune of 0.8 million barrels per day
(bpd) in the first half of 2020.
While the Minister of State for Petroleum Resources, Timipre Sylva
has assured OPEC of compliance to cuts, there are concerns for the
implementation of the 2020 budget if oil prices fall below proposed
benchmark.
In the proposed 2020 budget, the Federal Government estimated oil
sales to stand at 2.18 million bpd at a price of $57 per barrel, while
the exchange rate is expected to remain N305 per dollar.
“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,” says Bjørnar
Tonhaugen, head of oil market research at Rystad Energy. “The outlook
will be bleak if OPEC+ fails to agree on additional cuts.”
“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 bpd – a drop
of 0.8 million bpd 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 bpd year-on-year to 28.3 million bpd.
“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 bpd is far above the ‘call’ for
2020. Alas, without deeper cuts taking effect in January 2020, large
global implied stock builds are on the cards,” Tonhaugen remarked.
Rystad Energy sees three alternative OPEC+ decision scenarios: “Base
case: Extension of current production cuts to June 2020. Global oil
market will be oversupplied to the tune of 1.2 million bpd in 2020.
Significant oil price correction, possibly down to the low $40s for a
short period, is likely.
“Deeper cuts: Additional cut of 0.75 million bpd on top of the 0.3
million bpd in the extension scenario would reduce the supply overhang
and ensure stable prices.
“No deal/market share war: A ramp-up to maximum production capacity
in all countries could have devastating effects. With potential stock
builds of 2.3 million bpd, oil prices could fall below $30/bbl – lower
than during the previous lows of 2016. Such a scenario would be
devastating for the forward curve structure as potential stock builds
would be larger than what we have observed historically”.
Rystad Energy finds that OPEC+ as a whole has cut oil production by
2.6 million bpd year-to-date, compared to October 2018 reference levels
and the cut target of approximately 1.2 million bpd. The additional 1.4
million bpd 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 bpd in 2019, or
2.7 times its target cut of 322,000 bpd.
“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 bpd
year-on-year in 2020, led by US shale, Norway and Brazil against weak
global demand growth of only 1.0 million bpd year-on-year. Rystad Energy
forecasts that non-OPEC non-US supply will grow 1.2 million bpd
year-on-year in 2020, OPEC estimates this number at 0.6 million bpd
year-on-year.
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