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OPEC and its partners will not further deepen the reduction of their oil production, but will discuss this topic again in December. This is what the newly appointed Saudi energy minister, Abdulaziz bin Salman, told the media after the meeting of this week's Joint Ministerial Follow-up Committee. A discussion, however, may not be enough. OPEC + could be forced to decide to cut deeper to avoid a significant drop in prices.
When OPEC + agreed to remove 1.2 million bpd from the world market last December, reference prices reacted with little enthusiasm. In hindsight, it announced difficult times. Although prices recovered at the beginning of the second quarter of the year, with Brent reaching $ 70 per barrel, the recovery was brief and the correction followed fairly quickly.
OPEC has over-complied with its production quotas. US sanctions against Venezuela and, to a lesser extent, Iran, contributed to this situation. And yet, prices have not yet risen and remain higher. Brent hovering around $ 60 a barrel and WTI is between $ 50 and $ 58. And now prices are likely to fall further if demand forecasts from some of the world's largest energy agencies are correct.
Julian Lee, Bloomberg, warned this week that the oil cartel and its partners would be even worse next year due to slowing demand for oil, according to the Energy Information Administration and OPEC.
Indeed, in its latest short-term energy outlook, the EIA forecast for global demand for liquid fuels would increase by 900,000 barrels per day on average for the 2019 period. This is a drop from the previous forecast of a growth rate of demand of 1.3 million bpd.
For its part, the International Energy Agency predicted that average demand would increase by 1.1 million bpd this year compared to the previous monthly estimate. By 2020, it would increase to 1.3 million bpd.
It is interesting to note that OPEC is the most pessimistic of demand. For this year, the group expects 1.02 million bpd, with a slight improvement to 1.08 million bpd next year. Related: Growth in oil demand is weakest for almost a decade
The slow growth of demand is already serious enough when you sacrifice market share growth for higher prices. Yet, if you associate growing production in places you can not control, the news becomes really bad.
In addition to the obvious footprint of OPEC's work, US shale, production growth is imminent in Norway and Brazil. In the United States, OPEC is forecasting 1.8 million bpd this year, which is well above the EIA's forecast for domestic production growth of 1.2 million bpd. The IEA, for its part, sees the United States and Norway increasing production by one million barrels a day in the second half of this year, with Brazil adding 130,000 barrels a day.
To make matters worse, an additional amount of American oil pumped into shale shale will reach international markets with the commissioning of some 2 million bpd of new pipeline capacity.
In this context, OPEC's limited options become clear. The cartel has two choices, and no one is talking about the second: a repetition of the "death-pump" approach that resulted in the collapse of prices in 2014. The reason why nobody talks about it , it is that OPEC members do not have enough financial reserves to withstand another price collapse. This leaves them with a choice: to reduce production more.
Yet this is also a problem. Russia has repeatedly stated that it does not like cuts too much. Moscow has always expressed support for supply controls, but is reluctant to fully comply with these controls, particularly because it can work very well with a weaker oil. The Russian central bank recently announced it has set a price of 25 dollars a barrel of crude in a risk scenario for next year. This is a fairly nutritious element of reflection for the Russian partners of the reductions.
By Irina Slav for Oilprice.com
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