JP Morgan: Oil market may face risk of additional 300,000 b/d tightness in 1Q20
BAKU, Azerbaijan, Dec. 10
By Leman Zeynalova – Trend:
Oil market may face a risk of additional 300,000 barrels per day (b/d) tightness in the first quarter of 2020, Trend reports citing US JP Morgan bank.
“OPEC+ surprised markets by pledging to increase crude oil production curbs from 1.2mn bpd to 2.1mn bpd in 1Q. Specifically, OPEC+ agreed to deepen its formal production curbs in 1Q from 1.2mn bpd to 1.7mn bpd relative to October 2018 output levels, with OPEC accounting for three fourths of the 500kbpd change in the target. In addition, Saudi Arabia pledged to cut a further 400kbpd subject to all OPEC+ members implementing their existing commitments,” reads a research by JP Morgan.
While it remains to be seen whether the agreement will bring overproducing countries such as Iraq and Nigeria into compliance, Saudi Arabia has given a strong incentive to these countries by pledging to keep its own production at 9.7mn bpd, well below its new OPEC+ quota of 10.15mn bpd, said the bank.
“Under the agreement, Russia has pledged to cut its crude oil production by an additional 70kbpd, but received OPEC+ agreement to the Russian demand to exclude condensates from the calculation
of their quota as is already the case for OPEC producers. Although doubts about whether all signatories will abide by the existing curbs will linger, the larger than expected cut has pushed Brent crude oil prices above $64/bl, up from about $60/bl at the start of the week. OPEC+ preferred to defer a decision on their strategy beyond 1Q to their next meeting on March 5th, but the large expected increase in non-OPEC supply is expected to push OPEC to maintain production curbs for the rest of 2020,” reads the research.
JP Morgan’s oil strategists had already baked in over compliance from Saudi Arabia and higher compliance from Iraq in 2020, but given the current cuts are in addition to the over compliance, it would make their balance even tighter (assuming countries adhere to their new quotas) than initially expected in 1Q20.
“Our oil analysts ran their balances off the latest announced cuts and they see a risk of additional 300 kbd tightness in 1Q20 which brings 1Q20 to be ~700 kbd undersupplied in their balances for now (vs -400kbd in 1Q20). They attribute additional 200 kbd revision to their OPEC number and 100 kbd cuts to non-OPEC in their balances. Additionally, they believe there is more risk coming on the supply front from Brazil as they believe based on latest Petrobras’ guidance that Brazil oil production growth would be much lower to flat in 2020 vs 2019. Currently, they forecast Brent to average $64/bbl in 1Q20. This makes them risk bias positive for 1Q20. With increased producer hedging expected from current rally, the curve structure is expected to strengthen further into steeper backwardation.”
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