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OPEC’s own analysis shows potential need for deeper cuts

OPEC will have a tough decision to make at its December meeting, with its own analysis showing demand for its oil next year will be below October production.

This comes as the producer group boosted output last month, largely due to a sharp rebound in Saudi Arabian production as the key producer made up for losses after the attack on its key oil facilities in September.

Looking at the fundamentals in its recently published monthly oil market report, OPEC might have to deepen its cuts to balance the market in 2020 as bearish factors combine, including stubbornly high non-OECD stocks and steady supply from the US even with downward revisions.

But the producer group kept its 2020 oil supply and demand forecast unchanged, echoing recent comments from OPEC secretary general Mohammad Barkindo that brighter spots are emerging for the oil market in 2020.

Barkindo has repeatedly said the oil market has been too pessimistic over US-China trade tensions and that there are many positive indicators ahead for the global economy.

The report said demand for OPEC crude in 2020 will average 29.58 million b/d, 70,000 b/d below its production last month. Demand for its crude this year will average 30.70 million b/d, it said, a 900,000 b/d fall from 2018.

SAUDI RECOVERS LOST GROUND
The group’s 14 members pumped 29.65 million b/d in October, compared with 28.71 million b/d in September, according to OPEC secondary sources.

The rise was due to a strong recovery by Saudi Arabia, after its output fell sharply due to the September 14 missile strikes on its Abqaiq processing facility and Khurais oil field.

Saudi Arabia’s crude output surged 1.17 million b/d to 10.30 million b/d last month, according to official figures self-reported to OPEC.

This is the most the country has produced since December last year, according to its own data.

However, secondary sources used by OPEC to monitor output, including Platts, pegged Saudi Arabia’s October output much lower at 9.89 million b/d.

The production level is right at its quota of 10.31 million b/d under an OPEC/non-OPEC output cut agreement that is scheduled to run through March.

Iraq and Nigeria continued to produce over their quotas, while UAE, which is now OPEC’s third-largest producer, also pumped above its quota of 3.07 million b/d, according to OPEC secondary sources.

SUPPLY UNCERTAINTIES
OPEC warned the 2020 non-OPEC supply forecast remains subject to many uncertainties.

Its non-OPEC supply forecast was a touch lower, growing 2.17 million b/d to average 66.46 million b/d.

The key drivers of growth include the US, Brazil, Norway, Russia, Canada, Kazakhstan and Australia, which will be offset by declines in Mexico, Indonesia, Egypt and Colombia.

However, while the US remains a key contributor, the analysis arm downgraded supply expectations for the country.

Investment discipline by independent companies along with recent drilling and completion activity levels have led to a slight slowdown in US oil production growth.

Pipeline constraints in Canada, along with unplanned outages, delayed startups and unexpected maintenance are also some of the reasons for the uncertainty, the report added.

OPEC lowered its 2020 US oil output forecast due to a “lower rig activity and flat capital spending,” it said.

US crude production in 2020 will grow by 1.02 million b/d year on year to average 13.20 million b/d, it said.

OPEC kept its forecast for oil demand growth unchanged for 2019 and 2020, with overall demand breaching the 100 million b/d mark next year.

After a raft of downward revisions in previous months, concerns around the health of the global economy have eased a little, with oil demand growth of 980,000 b/d in 2019 and 1.08 million b/d in 2020.

DIVERGENCE IN STOCKS
OPEC admitted its recent production agreements have had a stronger impact on OECD inventories than non-OECD stocks.

This is because “emerging and developing countries continue to build their reserves, as well as fill new refinery capacity to meet growing oil demand,” it said.

Since OPEC and its allies agreed on production cuts in late 2016, there have been diverging trends in OECD and non-OECD stocks. OECD commercial inventories have fallen by 57 million barrels, while non-OECD stocks have seen a build of 138 million barrels, the report noted.

OECD commercial oil inventories fell marginally to 2.95 billion barrels in September and were 28 million barrels above the five-year average, according to OPEC’s report.

US total commercial oil stocks fell by 17.3 million barrels to stand at 1.28 billion barrels in October, according to preliminary data.
Source: Platts

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