Rystad Energy analysis – What’s at stake in Vienna

Source: press release, 6 December 2018

US crude and condensate (oil) production, monthly (source: Rystad Energy OilMarketCube and OilMarketCube Archive, EIA STEO)
US crude and condensate (oil) production, monthly (source: Rystad Energy OilMarketCube and OilMarketCube Archive, EIA STEO)

The OPEC + countries must cut 2019 supply growth by 1.5 million bpd if they want oil prices back above $70 next year.

US production at $50 WTI levels would remove only 0.4 million bpd of the looming 1.5 million bpd surplus in the balances that Rystad Energy forecasts for 2019 in a status quo scenario.

“We believe a cut announcement that effectively removes anything less than 1 million bpd of 2019 supply would be interpreted negatively by the market,” says Bjornar Tonhaugen, head of oil market research at Rystad Energy.

He says the market is now at the mercy of OPEC and the 10 non-OPEC countries that have previously agreed to curb production.

“To surprise the market in a bullish fashion, we believe cuts approaching 2 million bpd would have to be announced. Should OPEC+ announce a 1.5 million bpd cut, we believe the market reaction would be neutral at first, but gradually pave the way for a recovery in oil prices above the $70 level for Brent in 2019,” Tonhaugen adds.

At the 175th (Ordinary) OPEC Meeting that opens in Vienna today, OPEC+ producers face a recurring dilemma: US shale oil production is again growing too fast, just as it did in 2014. The reality is that back in May 2018, when the US announced re-imposing sanctions on Iran, OPEC+ agreed to increase production to compensate for the future supply losses from Iran (and Venezuela). The prevalent view in the market at the time was that US production growth would be constrained owing to take-away bottlenecks in the Permian Basin.

Rystad Energy, an independent energy consulting services and business intelligence data firm, argued at the time that US production would manage to continue growing robustly through 2018, as could be seen through our well-by-well data coverage. But our forecasts – while higher than those of OPEC, the EIA and the market in general – still underestimated the supply growth from the US.

“Should OPEC+ decide this week not to cut production substantially, the market can probably wave goodbye to any hopes of short-term recovery in prices from current levels, and more likely say hello to even lower levels for parts of next year. All eyes on Vienna,” says Tonhaugen.