Further oil production cut required to keep oil price above $40 in 2020

New oil production cuts must be announced by the Organisation of Petroleum Exporting Countries and its allies (OPEC+) to keep oil price above $40 per barrel.

According to Guardian, Rystad Energy, in its latest report, disclosed that the global oil market could be profoundly oversupplied by 0.8 million barrels per day (BPD) in the first half of 2020, as empirical evidence had shown that a 1 million BPD surplus of oil could lead to a decline in oil prices by around 5% per month, and a potential drop of 30% over six months.

Bjørnar Tonhaugen, head of oil market research at Rystad Energy, expressed his concerns about the bleak outlook if OPEC+ doesn’t agree to the additional cuts.

“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. 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,” Tonhaugen added.

Possible outcomes in the year 2020: According to Rystad Energy, if OPEC+ continues with the current production cost till June, oil prices will hit $40 but a price correction will most likely occur in a base case scenario option. Other options include an additional  0.75 million BPD aside the initial 0.3 million BPD. The worst-case scenario option is for all countries producing at maximum capacity to leave prices at the mercy of the market.

“Base case: Extension of current production cuts to June 2020. 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.

“Deeper cuts: 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.

“No deal/market share war: 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,” said Rystad Energy.

Implication for the Nigerian economy: Though the Minister of State for Petroleum Resources, Timipre Sylva has assured OPEC of compliance to cuts. The country’s proposed budget estimated oil sales to stand at 2.18 million BPD at a price of $57 per barrel, while the exchange rate is expected to remain N305 per dollar. There are concerns for the implementation of the 2020 budget if oil prices fall below the proposed benchmark.

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