Oil may fall to $40, experts warn OPEC

Experts at an energy research group, Rystad Energy, have predicted that there will be a substantial build of global crude stocks and a corresponding drop in oil prices if the Organisation of Petroleum Exporting Countries fails to deepen production cuts in 2020.

OPEC and its allies, including Russia, will gather in Vienna, Austria, on Thursday (today) and Friday to discuss oil output levels in 2020.

The Head of Oil Market Research at Rystad Energy, Bjørnar Tonhaugen, said, “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.

“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 barrels per day in the first half of 2020.

“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.

He said 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 was far above the demand for 2020.

“Alas, without deeper cuts taking effect in January 2020, large global implied stock builds are on the cards,” he said.

Rystad Energy said OPEC+ could extend current production cuts to June 2020, adding, “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.”

It said 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.

The experts said 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.”

“Saudi Arabia has signalled 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 per cent compliance with their target cuts,” Tonhaugen said.