The OPEC+ countries will not be able to increase their collective oil production levels in the second half of 2019 without having a detrimental effect on oil prices, according to Rystad Energy.
However, the independent energy research and business intelligence company believes that the production cuts required by OPEC+ in order to support prices need not be as much as 1.5 million bpd.
That is contrary to what traditional supply-demand balances suggest, owing to a tight market for medium and heavy barrels and the fast-approaching IMO 2020 shipping fuel changes, which are expected to cause an increase in crude demand.
Disappointing global demand and strong production growth in the US are also weighing on OPEC+’s decision, which may be postponed to early July.
As market observers are preparing for the 6th OPEC Ministerial Meeting in Vienna, Austria, Rystad Energy’s Chief Oil Market Analyst, Bjørnar Tonhaugen, offers the following assessment:
“We expect crude demand to accelerate thanks to the upcoming IMO 2020 regulations later this year, and OPEC will likely not have to cut production as much as the call on OPEC suggests. Having said that, there will not be room for the cartel to increase output for the rest of 2019 in our view,” says Tonhaugen. “However, due to a current crude quality mismatch in the market, with tight supplies of medium and heavy barrels and a surplus of light, sweet supply, the actual call on OPEC+ barrels, which mostly consist of the former, will not decline by as much as overall global supply-demand figures suggest,” he adds.
Rystad Energy’s supply-demand forecast suggests that the so-called call on OPEC production will decline by 1.5 million bpd to 29 million bpd from the second quarter to the fourth quarter of 2019.
OPEC+ account for nearly 49 million of the 84 million bpd of global crude and condensate production expected to be produced on average in 2019.
“Undoubtedly, OPEC+ policies are very important for global oil supply. However, what matters now is the extent to which production will grow from countries outside the OPEC+ alliance relative to demand growth. We expect non-OPEC+ production to grow by 1.9 million bpd year-on-year in 2019, driven by the continued rise of the US shale industry, whereas global demand is expected to grow only by between 1.1 million and 1.2 million bpd year-on-year,” Tonhaugen remarked. “In other words, as non-OPEC+ adds more supply than global demand is increasing by, OPEC+ will still be pressured to manage production in order to balance the global market.”
Rystad Energy forecasts that US oil production will grow by 1.6 million bpd y/y in 2019, with monthly production reaching 13.4 million bpd by December 2019. The brunt of the supply growth comes from the Permian Basin, the prolific shale play in Texas and New Mexico.
Brent benchmark crude prices have shed more than US$13/bbl since reaching a recent peak in May on mounting concern of a global economic slowdown. Fears that US President Donald Trump’s imposition of tariffs could set off a trade war between the US and China, igniting in turn a global recession, also dampen the outlook.
“However, the fears about the impact of recent tariffs on global oil demand growth are overblown,” Tonhaugen said. “We believe the current oil price weakness is fueled more by expectations of faltering trade prospects and a worsening global economy, rather than by the direct effect of new and existing tariffs on oil demand.”
Rystad Energy’s analysis suggests that if the US and China proceed with another round of tariff hikes, covering all their respective trade volumes, global oil demand growth could fall by 100 000 bpd in 2019 and 400 000 bpd in 2020. This is the direct result of lower trade volumes for the US and China, as well as for China’s main Asian trade partners such as Japan, South Korea and the EU.
“The downside may be even greater if the global economy, especially the Chinese economy, continues to slow. With this in mind, we believe the market is currently bracing for a greater impact than what current tariffs will deliver,” Tonhaugen remarked.
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