Further OPEC action to do little to stem tide of bearish sentiment in oil market
Further OPEC action will do little to stem tide of bearish sentiment in the oil market, Trend reports with reference to Fitch Solutions Macro Research (a unit of Fitch Group).
“Following the outbreak of 2019-nCoV and the subsequent slide in Brent price through January, OPEC sources have begun to raise the prospect of further production cuts by the group. Saudi Energy Minister Prince Abdulaziz bin Salman sought to reassure markets, with a statement that OPEC would respond to concerns about the coronavirus fallout on oil demand,” said the report.
Fitch Solutions believes that an extension of the cuts beyond March 2020 is now highly probable and, depending on the length of the epidemic, additional cuts look increasingly likely.
“In our view, further OPEC action will do little to stem the tide of bearish sentiment in the market, evidenced by the almost total lack of positive price action from the recent outages in Libyan production (of around 900,000b/d),” said the company.
Also, Fitch Solutions points out that the social unrest in Iraq remains heightened and could still spillover impacting upstream and export facilities, adding to the potential for more supply disruptions.
“OPEC will face the persistent headwinds of lessened demand in their attempt to stabilise prices through supply management. OPEC and Russia were holding 1.9mn b/d of oil out of the market in December 2019 and large additional cuts would likely be needed, in order to move the dial on prices. In addition, we note that compliance with the OPEC+ agreement varies significantly for some members making further production cut increases challenging,” reads the report.
While OPEC+ will continue to restrain their output, the net reduction in OPEC supply will be limited by a stabilization in production in Venezuela and Iran, Fitch Solutions believes.
“In combination, these two markets saw their output slump by around 2.5mn b/d y-o-y in 2019, as US sanctions choked off exports and backed in supplies. In 2020, we forecast only a 185,000b/d decline in production; sanctions are unlikely to be rolled back, but there is little scope for exports (or output) to topple further. Without an adequate offset from OPEC, non-OPEC supply will push global net growth to around 1.5mn b/d this year, overwhelming the increase in global consumption. US production growth, whilst slowing due to a sharp deceleration in shale growth, will still remain positive in volume terms; we see an additional 1.1mn b/d of new crude, condensates and NGL supply through 2020.”
The company said it does not anticipate that the slump in growth witnessed over 2019 will be repeated in 2020, as a build out in takeaway capacity, a slowdown in y-o-y capex declines and low base effects begin to take hold. “Added to this are strong gains from other non-OPEC markets, including Norway, Guyana and Brazil. Much of these additions will be front-loaded, ramping up across the first few months of the year.”