The global oil cartel and its allies earlier this month agreed to increase their oil production cuts beginning with the new year, but those reductions are unlikely to resolve a massive oversupply, according to Rystad Energy.
The Organization of the Petroleum Exporting Countries, aka OPEC, and its allies including Russia plan to overall production levels by another 500,000 b/d from January through March. Since July, OPEC-plus has curbed oil output collectively by around 1.2 million b/d. The latest cutback increased the total pullback overall to 1.7 million b/d through March.
“The OPEC cuts didn’t fully solve the problem,” said Rystad’s Bjørnar Tonhaugen, head of oil market research. “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 oversupply reflected in our balances and call-on-OPEC.”
Rystad’s conclusion that deeper oil reductions are required was driven by a bottom-up supply analysis, which indicated an oil production surplus despite the recent cuts. Analysts incorporated the new agreement assuming full compliance with the new targets by core OPEC members Saudi Arabia, Kuwait and United Arab Emirates.
“We find that OPEC production is likely to average 29.3 million b/d for the first quarter of 2020, which compares to our call-on-OPEC of 29.0 million b/d,” researchers said.
Analysts expect the oil market balance outlook to become more challenged later next year after the initial effect of the International Maritime Organization (IMO) marine fuel regulations, which begin Jan. 1. Demand fears eventually may “creep back into the market” as production rises.
“As long as OPEC sticks to production pledges and Saudi Arabia cuts an additional voluntary 400,000 bbl as promised, the implied production target for OPEC is 29.2 million b/d, above our call-on-OPEC and thus likely to result in stock builds and downward pressure on oil prices,” Tonhaugen said.
For the first three months of 2020, the market should remain “nearly balanced” with 0.3 million b/d of implied stock builds, according to Rystad. Including a positive effect from IMO on crude demand to around 0.3 million b/d in 1Q2020, the market should be balanced.
In March, however, OPEC-plus could be forced to reduce output through the rest of the year.
“Worryingly, for the last three quarters of 2020, the call-on-OPEC is forecast to average 28.9 million b/d on the assumption of a positive IMO effect, but only 28.3 million b/d without our expected 0.6 million b/d IMO effect on crude demand,” Tonhaugen said.
“In other words, the implied production target for OPEC of 29.2 million b/d is likely not low enough to avoid stock builds and downward pressure on oil prices, putting the $60/bbl Brent oil price environment in jeopardy in 2020.”
The current price floor, Tongaugen said, “is fragile beyond 1Q2020.”