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Page added on December 4, 2019

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Will OPEC Really Risk An Oil Price Crash?

Consumption

The Organization of the Petroleum Exporting Countries and non-OPEC partners led by Russia, are now nearly two years into their production agreement and are expected to roll-over the accord through the end of June 2020 in order to stabilize crude markets and prices. Their goal has so far been elusive amid faltering demand growth and surging production from non-cartel members such as the U.S. and Brazil, which is expected to decrease OPEC’s market share in some of the world’s fastest-growing markets.

In their annual World Oil Market Outlook released in November, OPEC acknowledged that its global market share will drop to 31% in 2024 from 37% in 2018, as production declines by a staggering 2.2 million bpd within the next five years. Not surprisingly, many OPEC members aren’t keen to give up market share, and have been relentlessly producing above their pledged quotas, clouding the prospect of OPEC+ reaching consensus on an extension of the deal.

With less than a week left before the highly anticipated biannual meeting in Vienna on Dec. 5-6, key members of the OPEC+ alliance might need to reconsider their strategy on how to achieve balance in the market.

Oil prices have on average risen as a result of the OPEC’s production cuts, but this time it’s different. In the beginning of July, the group agreed to extend its pact through the first quarter of 2020, with a policy review meeting set in December. Since then, global crude benchmarks have barely responded.

(Click to enlarge)

The world economy may have avoided a recession, but trade war uncertainty, a protracted decline in global manufacturing and a slew of greenfield projects from up-and-coming producers all helped to undermine OPEC’s efforts to push prices higher. In short, “there are black swans all around us,” said Russian Energy Minister Alexander Novak.

Throughout the year, the ongoing trade war between the United States and China has taken its toll on global financial markets, and with it, the demand for crude oil. The trade dispute has hit export-driven economies such as Germany hard, with manufacturing activity slowing globally. Germany’s industrial output hit a decade low this year, as demand for its machinery in China started to plunge. Manufacturing is one of the most capital and energy-intensive parts of the economy, and the latest downturn suggests continued a slowdown in fuel demand and downward price pressure.

In response to the escalating trade tensions, the International Energy Agency, U.S. Energy Information Administration and OPEC lowered their forecasts for the world’s oil demand growth from 1.5 million bpd last year to between 1 and 1.2 million bpd in 2019, complicating the cartel’s tough balancing act. OPEC noted the typical 2 million bpd seasonal uptick in global oil demand during the summer did not happen this year for the first time on record.

In their Oil Market Report for November, the IEA said that global refinery crude throughputs are set to decline by 90,000 bpd this year, stating that this would be the first annual decline since 2009, and that this “partly explains the relative weakness of crude prices for most of 2019.”

Adding to the uncertainty, markets now expect a slew of new projects in 2020 from producers outside the alliance, namely Norway, Brazil and the United States.

Norway reported that crude production from the Johan Sverdrup field- the largest green-field project in the North Sea since 1990 – began ahead of schedule in October, bringing online as much as 660,000 bpd of oil at its peak. Brazil continues the development of its new pre-salt deposits, with oil production slated to grow by 24% to 3.2 million bpd by 2022, according to Wood Mackenzie data.

In its latest forecast, the IEA sees total non-OPEC supply expanding by a staggering 2.3 million bpd, nearly double the expected increase in demand of 1.2 million bpd.

Yet, it was U.S. shale that had the most disruptive impact on the energy markets this year. Despite forecasts of an impending slowdown, tight oil producers relentlessly defied critics and just last week reached a new record high of 12.8 million bpd.

The unexpected turn of events for both demand and supply have left OPEC+ with no good options. If OPEC+ fails to extend the production agreement, the price of oil will collapse, undermining the credibility of OPEC as an authority in the markets. In the most likely scenario of business as usual, OPEC’s three-month quotas extension has already been baked into prices and will likely fall flat or result in a modest selloff when announced.

On the other hand, OPEC may just surprise the markets, as it did so in the past and deepen the cuts – an idea that has been strutted by some OPEC officials this year. Deeper cuts would surely trigger a price rally into the end of the year but will be met with tough resistance from some of the cartel members that have seen their market share shrink over the last two years. As we enter the last month of the year, OPEC is set to choose from the lesser of many evils, with the outcome having a long-lasting effect on the demand-supply balance next year.

By Liubov Georges for Oilprice.com



25 Comments on "Will OPEC Really Risk An Oil Price Crash?"

  1. Richard Guenette on Wed, 4th Dec 2019 12:25 pm 

    Globalization has failed. What ever happened to sovereignty?

  2. Richard Guunette on Wed, 4th Dec 2019 12:26 pm 

    Vasectomies are stupid

  3. Richard Guunette on Wed, 4th Dec 2019 12:50 pm 

    Many great soldiers were trained at the School of the Americas including my father

  4. Richard Guunette on Wed, 4th Dec 2019 1:12 pm 

    European South Americans slaughtered millions of natives in the previous 5 centuries.

  5. Richard Guunette on Wed, 4th Dec 2019 1:25 pm 

    Americans should not allow Spanish to be a second language

  6. Robert Inget on Sat, 7th Dec 2019 11:07 am 

    Not to worry. Unless of course you are concerned about your Florida Condo investment.
    Consumption is UP across the board. Read news releases carefully. It’s true, the RATE of growth is slowing. Nevertheless, we consumed a million barrels -/+ more in 2019 than 18.

    When you read “the world is awash with oil”, there’s a ring of truth within. The planet is consuming well over 100 million barrels 24/7.
    In the US alone we burned up 21 MBB p/d

    Total products supplied over the last four-week period averaged 21.2 million barrels per
    day, up by 0.3% from the same period last year. Over the past four weeks, motor gasoline
    product supplied averaged 9.2 million barrels per day, up by 0.8% from the same period
    last year. Distillate fuel product supplied averaged 4.2 million barrels per day over the
    past four weeks, up by 1.8% from the same period last year. Jet fuel product supplied was
    up 1.4% compared with the same four-week period last year. (last week Nov, 2019)
    http://ir.eia.gov/wpsr/wpsrsummary.pdf

    Ya can’t move that much oil w/o some of it slopping over. Hence “the world is awash”

    https://www.bing.com/images/search?q=world+oil+consumption+2019&qpvt=world+oil+consumption+2019&FORM=IGRE

    Bob

  7. Robert Inget on Sat, 7th Dec 2019 11:12 am 

    Richard, Americans are far too lazy to learn Spanish or French or German or Chinese but
    you should learn Russian.

  8. Cloggie on Sat, 7th Dec 2019 11:21 am 

    “Richard, Americans are far too lazy to learn Spanish or French or German or Chinese but
    you should learn Russian.”

    Is Richard from Alaska?

  9. Davy on Sat, 7th Dec 2019 11:41 am 

    Richard Guunette is me cloggo. Stupid.

    The real Richard Guenette is French Canadian.

  10. JuanP on Sat, 7th Dec 2019 12:04 pm 

    Richard Guunette and Richard Guenette and many other socks here are my creation. I also do extensive ID theft to deceive people. This has worked best with old people like makati1. He is clueless to my ID theft. I love misleading people. I am the board troll and proud of it.

  11. Cloggie on Sat, 7th Dec 2019 12:08 pm 

    Juan, keep up the trolling it is a good diversion for my enemies.

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  13. JuanP lies on Sat, 7th Dec 2019 12:24 pm 

    the board troll is a disgusting liar

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    More Davy ID Theft said JuanP on Sat, 7th Dec 2019 12:04 pm Cloggie on Sa…

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    More Davy ID Fraud said JuanP lies on Sat, 7th Dec 2019 12:24 pm A healthy…

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    More Davy ID Fraud said JuanP lies and deception on Sat, 7th Dec 2019 12:3…

  19. Gallop knows on Sat, 7th Dec 2019 1:01 pm 

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    Gallop knows on Sat, 7th Dec 2019 1:01 pm

  21. JuanP is an idiot on Sat, 7th Dec 2019 1:52 pm 

    Where is stupid and his muzzie nonsense. Can you believe how stupid that shit is!

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    Please join us tonight at 11:00pm central for a JuanP vote ban. Help show your strong desire to have the disgusting fool removed from the forum

  23. REAL Vote ban notice on Sat, 7th Dec 2019 2:45 pm 

    Please join us tonight at 11:00pm central for a Delusional Davy vote ban. Help show your strong desire to have the disgusting fool removed from the forum.

  24. Davy on Sat, 7th Dec 2019 2:58 pm 

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