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Liubov Georges

Liubov Georges

Liubov Georges has graduated NYU with Master's Degree in Energy Policy and Economics. Currently, she is an energy analyst at DTN Oil&Gas

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Will OPEC Really Risk An Oil Price Crash?

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. Related: Will The OPEC Meeting Yield A Bullish Surprise?

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. Related: Why Oil Prices Just Jumped

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

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Leave a comment
  • Mamdouh Salameh on December 03 2019 said:
    The author of this article has repeated identical unsubstantiated claims made by other authors contributing to the oilprice.com. And despite corrections made frequently to their claims by readers of their articles, they continue adamantly to repeat the same claims and dare I say the same mistakes. Either they don’t read other readers’ comments or they are indoctrinated to repeat the same claims irrespective.

    The claim by the IEA that non-OPEC supply particularly from the US, Brazil and Norway will expand by 2.3 million barrels a day (mbd) in 2020 is not only self-delusional but also a plain lie and I will explain why.

    US shale oil production is already in steep decline as evidenced by the continued fall in oil rig count. US oil production could average under 11 mbd in 2019 and not the 12.8 mbd claimed by the EIA and is projected to drop to around 10 mbd in 2020.

    It will take Brazil more than 10 years to be able to raise its oil production significantly above the current production of around 2.6 mbd because of high costs of production from the pre-salt reserves. And with break-even price of $40 per barrel, Brazil needs oil prices exceeding $80 a barrel to attract major foreign investments as evidenced by the recent flop of its oil auction.

    As for Norway, its oil production has been declining by an average annual rate of 2.5% from 2.6 mbd in 2008 to 1.84 mbd in 2018. The new production from the Johan Sverdrup field in the North Sea could bring online some 660,000 barrels a day (b/d).

    Therefore, instead of adding 2.3 mbd as the IEA is hyping, the US, Brazil and Norway would be producing 1.64 mbd less in 2020.

    OPEC+ is well advised not to be seduced into deepening its cuts since such a measure will be futile while the trade war is going on as it will end up losing market share with no positive impact on prices. Furthermore, Russia and most OPEC members will never agree to that.

    It is possible, however, that OPEC+ might agree to roll over the current cuts for a few more months and wait for an end to the trade war. As long as the trade war continues, oil prices will hover around the lower $60s.

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

Leave a comment




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