The OPEC+ countries will not be able to increase their collective oil production levels in the second half of 2019 without having a detrimental effect on oil prices, according to Norwegian oil and gas intelligence firm Rystad Energy.
Even though a production increase is off the cards without influencing prices, Rystad Energy said on Tuesday that the production cuts required by OPEC+ to support prices need not be as much as 1.5 mbpd.
According to the intelligence firm, that is contrary to what traditional supply-demand balances suggest, owing to a tight market for medium and heavy barrels and the fast-approaching shipping fuel changes known as IMO 2020, which are expected to cause an increase in crude demand.
Disappointing global demand and strong production growth in the U.S. are also weighing on OPEC+’s decision, which may be postponed to early July.
Ahead of the 6th OPEC Ministerial Meeting in Vienna, Austria, Rystad Energy’s chief oil market analyst Bjørnar Tonhaugen said: “We expect crude demand to accelerate thanks to the upcoming IMO 2020 regulations later this year, and OPEC will likely not have to cut production as much as the call on OPEC suggests.
“Having said that, there will not be room for the cartel to increase output for the rest of 2019 in our view.”
Rystad Energy’s supply-demand forecast suggests that the so-called call on OPEC production will decline by 1.5 million bpd to 29.0 million bpd from the second quarter to the fourth quarter of 2019.
OPEC+, which consists of OPEC countries plus Russia and several other supportive producers, account for nearly 49 million of the 84 million bpd of global crude and condensate production expected to be produced on average in 2019.
“We expect non-OPEC+ production to grow by 1.9 million bpd year-on-year in 2019, driven by the continued rise of the U.S. shale industry, whereas global demand is expected to grow only by between 1.1 million and 1.2 million bpd year-on-year.
“In other words, as non-OPEC+ adds more supply than global demand is increasing by, OPEC+ will still be pressured to manage production to balance the global market,” Tonhaugen added.
A forecast by Rystad Energy stated that U.S. oil production would grow by 1.6 million bpd y/y in 2019, with monthly production reaching 13.4 million bpd by December 2019. The brunt of the supply growth comes from the Permian Basin, the prolific shale play in Texas and New Mexico.
U.S – China tariff war
It is worth noting that Brent benchmark crude prices have shed more than 13 dollars per barrel since reaching a recent peak in May. Fear of a possible trade war between the U.S. and China over tariffs also dampen the outlook.
“However, the fears about the impact of recent tariffs on global oil demand growth are overblown,” Tonhaugen said.
“We believe the current oil price weakness is fueled more by expectations of faltering trade prospects and a worsening global economy, rather than by the direct effect of new and existing tariffs on oil demand.”
Rystad Energy’s analysis suggests that if the U.S. and China proceed with another round of tariff hikes, covering all their respective trade volumes, global oil demand growth could fall by 100,000 bpd in 2019 and 400,000 bpd in 2020.
This is the direct result of lower trade volumes for the U.S. and China, as well as for China’s main Asian trade partners such as Japan, South Korea, and the EU.
“The downside may be even greater if the global economy, especially the Chinese economy, continues to slow. With this in mind, we believe the market is currently bracing for a greater impact than what current tariffs will deliver,” Tonhaugen concluded.
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