Oil prices could fall sharply in 2020

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The OPEC and its partners will not further deepen the cut in oil production, but will discuss the topic again in December. This is what the Minister of Energy of Saudi Arabia Abdulaziz bin Salman recently appointed say media after this week's meeting of the Joint Ministerial Control Committee. However, a discussion may not be enough. The OPEC + could be forced to decide to cut deeper to avoid a serious price collapse.

When OPEC + agreed to cut 1.2 million barrels a day from the global market in December last year, the reference prices reacted without much enthusiasm. In hindsight, this was an omen of difficult times. Although prices rose at the beginning of the second quarter of the year with Brent exceeding $ 70 a barrel, the rally was short and the correction followed fairly soon.

OPEC has exceeded its production quotas. US sanctions against Venezuela and, to a lesser extent, Iran have contributed to this. Still, prices failed to rise again and stay higher. The Brent was around $ 60 a barrel and the WTI was between $ 50 and $ 58. And now, prices should fall even more if the demand forecasts of some of the world's leading energy agencies are correct.

Julian Lee from Bloomberg put on guard this week even more difficult times have been foreseen for the cartel that produces oil and its partners next year, since the demand for oil has slowed down, according to the Energy Information Administration and the OPEC itself.

Indeed, in his last Short-term energy prospects, the EIA predicts that the global demand for liquid fuels would increase on average by 900,000 bpd for the whole 2019. This is down compared to a previous forecast of a growth rate of demand of 1.3 million barrels per day .

The International Energy Agency, for its part, forecast this year the average growth in demand would be 1.1 million barrels per day, unchanged from the previous monthly estimate, and in 2020 it would accelerate to 1.3 million barrels per day.

The OPEC, it is interesting, is the most pessimistic on the question. For this year, the group wait up this at 1.02 million bpd, with a slight improvement to 1.08 million bpd next year. Related: Growth in weaker oil demand in almost a decade

Slow growth in demand is quite negative when you sacrifice market share growth at higher prices. However, combined with the increase in production from places you can't control, the news gets really bad.

In addition to the obvious key to the OPEC works, the American shale, production growth is imminent also in Norway and Brazil. In the United States, the OPEC forecasts that production will grow by 1.8 million barrels this year, which is substantially higher than the EIA forecasts for domestic production growth, at 1.2 million barrels. The IEA, for its part, sees the United States and Norway increase production by a combined million bpd in the second half of this year, with Brazil adding another 130,000 bpd.

To add insult to injury, more of the US oil pumped into the shale area will reach international markets with about 2 million bpd of new pipeline capacity coming into operation.

In this context, the limited options of the OPEC become clear. The cartel has two choices and nobody talks about the second: a repetition of the pump-to-death approach that led to the 2014 price collapse. The reason why nobody talks about it is that the members of the OPEC are missing of sufficient financial reserves to stand up to another price collapse. This leaves them with a choice: cut more production.

Yet there is also a problem with this. Russia has repeatedly indicated that it is not too fond of multiple cuts. Moscow has been consistent in its general support for supply controls, but is reluctant to fully comply with these controls, also because it can do well even with a reduction in oil. The Russian central bank recently said it had entered a price of $ 25 a barrel of crude oil in a risk scenario for next year. This is a little nutritious enough food to think about Russian partners in cuts.

By Irina Slav for OilScore

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