The 14-country OPEC bloc, Russia, and a host of other OPEC+ countries agreed on 6 December 2019 to bump up the group’s target oil-production cuts by just over half a million barrels per day, from 1.195 million to 1.699 million bpd, effective 1 January 2020.
“The OPEC cuts didn’t fully solve the problem – instead they offer a light bandage to get through the first quarter of 2020, but after that, we believe the market will begin to realize the looming over-supply reflected in our balances and call-on-OPEC,” says Bjørnar Tonhaugen, head of oil market research at Rystad Energy.
The conclusion that deeper cuts are needed is driven by Rystad Energy’s bottom-up supply analysis, which points to a surplus of oil barrels sloshing around despite the most recent OPEC+ policy. In our revised supply forecast in the upcoming release of our OilMarketCube database, we incorporate the new OPEC+ agreement assuming full compliance with the new targets by core OPEC members Saudi Arabia, Kuwait and UAE. We find that OPEC production is likely to average 29.3 million bpd for the first quarter of 2020, which compares to our call-on-OPEC of 29.0 million bpd.
Rystad Energy expects the oil market balance outlook to be further challenged later in the year, after the initial effect of the new IMO 2020 marine fuel regulations wears off and demand fears creep back into the market. We therefore see our call-on-OPEC at an average of 28.9 million bpd for the subsequent three quarters.
“As long as OPEC sticks to production pledges and Saudi Arabia cuts an additional voluntary 400,000 barrels as promised, the implied production target for OPEC is 29.2 million bpd – above our call-on-OPEC and thus likely to result in stock builds and downward pressure on oil prices,” says Tonhaugen.
The market looks nearly balanced for 1Q20 with 0.3 million bpd of implied stock builds, and if we include a positive effect from IMO 2020 on crude demand to the tune of 0.3 million bpd in 1Q20, the market balances in the first months of 2020. Come March, however, OPEC+ may be forced to cut even deeper to balance the market for 2020 as a whole.
“Worryingly, for the last three quarters of 2020, the call-on-OPEC is forecast to average 28.9 million bpd on the assumption of a positive IMO effect, but only 28.3 million bpd without our expected 0.6 million bpd IMO effect on crude demand. In other words, the implied production target for OPEC of 29.2 million bpd is likely not low enough to avoid stock builds and downward pressure on oil prices, putting the $60 Brent oil price environment in jeopardy in 2020,” Tonhaugen cautions.
“OPEC seemingly heeded our warning call that deeper production cuts are needed to sustain $60 Brent prices in 2020, but more is needed – the current price floor is fragile beyond 1Q20,” Tonhaugen concluded.