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Rystad Energy

Rystad Energy

Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products. Rystad Energy’s…

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Why Oil Markets Need New OPEC+ Cuts

As oil prices approach $70 a barrel, Rystad Energy expects that a short-lived price rally through the first half of 2020 will then lose momentum and be replaced by a need for additional production cuts by Russia and the cartel of oil producing countries, OPEC.

“We retain our bullish stance for the second half of 2019 and first half of 2020 as we anticipate OPEC+ to extend production cuts through 2019, while we also expect bullish oil market effects due to the introduction of IMO 2020 regulations on sulfur content in marine fuels,” says Bjørnar Tonhaugen, Head of Oil Market Research at Rystad Energy.

He added:

“However, the effects of the IMO 2020 ‘scramble’ will likely be short-lived. By 2021 there will be renewed pressure on Saudi Arabia and OPEC+ to cut production again, or risk a new down-cycle in oil prices.”

 

Rystad Energy sees that US shale production is causing a “recurring dilemma” for the OPEC countries. 

“We tentatively expect a correction in prices, possibly already from the second half of 2020 and into 2021, as the IMO effect fades. Nevertheless, the biggest issue is the ability of the US shale industry to grow by 1.4 million bpd annually between 2020 and 2025 in our current base case, which is enough to keep up with global demand, causing a recurring dilemma for Saudi Arabia and OPEC,” Tonhaugen remarked.

Rystad Energy forecasts that the upcoming IMO 2020 sulfur limit regulations for marine bunker fuels will have short-lived consequences for the world’s oil markets. We conclude that despite around 2,800 vessels having so-called scrubbers installed on average in 2020, and refiners gearing up and readjusting to meet the increased low sulfur fuels demand (LSFO, MGO) while also getting rid of most of the high sulfur fuel oil (HSFO) currently produced, there will still be a significant 0.6 million bpd deficit in marine gasoil in 2020.

“We estimate that global gasoil/diesel demand growth in 2020 could reach 1.7 million bpd, 1.4 million bpd of which is from marine bunkers, almost six times the five-year average global gasoil growth,” Tonhaugen said.

He added:

“This could have reverberations for the whole fleet of diesel-driven vehicles. Global diesel prices – also at the pump – could be higher in 2020 than many expect.”

By Rystad Energy

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  • Mamdouh Salameh on April 04 2019 said:
    OPEC’s crude oil production will not be affected by the IMO sulfur limit regulations for marine bunker fuels as the overwhelming global oil reserves is made of medium, heavy and extra-heavy crude. Light crude oil production can never replace other heavier crudes like OPEC’s and Venezuela’s. So the onus is on refineries around the world to gear up and readjust to meet the increased low sulfur fuels demand.

    Your claim of the ability of US shale oil industry to grow by 1.4 million barrels a day (mbd) by 2020 contrasts sharply with authoritative reports from the industry and analysis by serious researchers of a slowdown in US oil production and a projected production decline of 1-2 mbd mostly from shale oil production by 2020. This could translate into a US production range of 10.0-11.0 mbd in 2019 and 11.0 or less in 2020.

    Therefore, talking of a price correction from the second half of 2020 and into 2021 in the face of a slowing down US shale oil industry and a projected fast-growing global oil demand particularly from China is not only based on faulty assumptions but self-delusional.

    As such, global oil prices will not be needing support from new OPEC production cuts by then as the global oil market would have most probably become irrevocably balanced during this year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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