Oil prices may fall sharply in 2020

OPEC and its partners will not elaborate on cuts in oil production yet, but will discuss the topic again in December. Saudi Arabia's newly appointed energy minister Abdulaziz bin Salman said this to the media following this week's meeting of the Joint Ministerial Monitoring Committee. However, a discussion cannot be enough. OPEC + may be forced to decide to cut deeper to prevent a significant fall in prices.

When OPEC + agreed to cut 1.2 million hpd from the global market in December last year, reference prices reacted without much enthusiasm. In hindsight, this was a champion of tough times. Although prices rose at the beginning of the second quarter with Brent at the top $ 70 per barrel, the collection was short and correction soon followed.

OPEC has overcomplicated with its production quotas. US sanctions against Venezuela and to a lesser extent Iran have helped this. And yet, prices have not managed to rise again and stay higher. Brent has hovered around $ 60 a barrel, and WTI has been rangebound between $ 50 and $ 58. And now prices will fall further if demand forecasts from some of the world's top energy agencies are correct.

Bloomberg's Julian Lee warned this week that there were tougher times for the oil-producing cartel and its partners next year as oil demand subsided, according to the Energy Information Administration and OPEC itself.

Indeed, in its latest short-term energy savings, the EIA forecast would increase global demand for liquid fuels by an average of 900,000 bpd for the entire 201[ads1]9. This is down from a previous forecast of 1.3 million bpd demand growth.

The International Energy Agency, for its part, predicted average demand growth this year would be 1.1 million bd, unchanged from the previous monthly estimate, and by 2020, it would accelerate to 1.3 million bhp.

Interestingly, OPEC is the most pessimistic in terms of demand. For this year, the group expects this to be 1.02 million bd per day, with a slight improvement to 1.08 million bd per next year. Related: Oil demand growth slowed down for almost a decade

Slowing demand growth is bad enough when sacrificing market share for higher prices. At the same time as increasing production from places you cannot control, the news gets very bad.

In addition to the obvious wrench in OPEC's work, U.S. Slate, production growth is imminent in Norway and Brazil as well. In the US, OPEC expects production to grow by 1.8 million bd per year, which is significantly higher than the EIA's domestic production growth forecast, to 1.2 million bd. IEA, for its part, sees the US and Norway increase production by a total million million bd in the second half of this year, and Brazil adds another 130,000 bd.

To add insult to injury, more of the extra US oil pumped into the slate will reach the international the markets as approximately 2 million bpd of new pipeline capacity comes into operation.

Against this background, OPEC's limited alternatives become clear. The cartel has two choices and no one talks about the other: a repeat of the pump-them-to-death approach that led to a price collapse in 2014. The reason no one talks about it is that OPEC members lack sufficient financial buffers to withstand another price collapse unscathed. This gives them one choice: cut production more.

Still, there is a problem with this as well. Russia has repeatedly signaled that it is not so happy with more cuts. Moscow has been consistent in its general support for supply control, but is reluctant to fully comply with these controls, not least because lower oil can do well. The Russian central bank recently said it had set a price of $ 25 per barrel of crude oil in a risk scenario for next year. This is a little nutritious food for the Russian partners in the cuts.

By Irina Slav for

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