OPEC and its allies were again forced to take new measures to avoid a collapse in oil prices.
It is widely expected that the organization led by Saudi Arabia and Russia (now called “OPEC+”) will announce in Vienna on Friday an agreement to extend production cuts to set a minimum price. But a simple extension of the current OPEC+ cuts may not reduce the looming ocean of US oil expected to arrive next year.
And if OPEC fails to make these cuts in production, the global oil market will be supplied with about 800,000 barrels per day during the first half of 2020. This increased supply could spark a major correction in oil prices, which might lead the Brent crude to drop to $40 for a short period of time. It is expected that oil will fall by 30% from its current levels at $63 a barrel.
“The outlook will be bleak if OPEC+ fails to agree on additional cuts,” said the head of oil market research at Rystad Energy, Bjørnar Tonhaugen. Oil traders expect OPEC + to reach an agreement to extend production cuts for at least several months. The current agreement to cut production is scheduled to expire next March. Analysts say the market should be prepared for some very downward price moves.
Oil prices increased yesterday, Wednesday, by more than 3%, provided that OPEC takes the necessary measures that are expected by the markets. Reuters news agency said that the Iraqi Oil Minister expressed support for the extension of the production agreement until 2020.
The restrictions imposed by OPEC and Russia have largely succeeded in supporting oil prices, although they remained well below the $70 level that hit markets in October 2018. The problem is that non-OPEC countries, led by the United States, continue to increase production.
Oil production from countries outside OPEC is expected to reach a record 2,300,000 bpd in 2020. It is not surprising that the US shale oil revolution is the largest contributor to the upcoming oil flow. American production is expected to rise by 1,100,000 barrels per day in 2020, according to the Rastad Energy Group. However, it’s not just about US shale oil, but Norway and Brazil are also expected to add 1,000,000 barrels per day of oil production next year, and Canada is preparing for growth as well.
There is another problem facing OPEC as well, as some of its members, including Nigeria and Iraq, have not complied with the production quotas approved by the organization. Meanwhile, Saudi Arabia, the actual leader of OPEC, has borne the brunt of the production cuts. However, there are doubts about whether Saudi Arabia is ready to take greater steps when some of its fellow OPEC members pump more than supposed oil.
Once again, Saudi Arabia cannot allow the collapse in oil prices. The kingdom relies on oil revenues to pay off its huge domestic and military expenditures. According to the Arab Monetary Fund, Saudi Arabia needs oil prices of about $84 a barrel. Lower prices would force Saudi Arabia to drain its declining cash balance, borrow money or reduce the profits Aramco pays.