BAKU, Azerbaijan, July 28
By Leman Zeynalova - Trend:
OPEC’s experiment to increase production from August could backfire, Trend reports citing Rystad Energy.
“OPEC’s experiment to increase production from August could backfire as we are still nowhere near out of the woods yet in terms of oil demand. The overall liquids market will flip back into a mini-supply glut and a swing into deficit will not happen again until December 2020,” says Bjornar Tonhaugen, Rystad Energy’s Head of Oil Market Research.
Nevertheless, the total surplus of about 170 million oil barrels that will be created between August and November is only a fraction of the 1.4 billion-barrel stock overhang that was built up in the first five months of 2020. This historic inventory build-up will still act as a soft brake on price increases when demand rebounds.
On the supply side, the US provided a much-needed supply-side buoy. We made major revisions to both our historical and future output projections. Based on preliminary reporting from most of the big oil-producing states and satellite data that give us insights into frac activity, we now believe that oil production (crude and condensate) reached a bottom of 10.4 million bpd in May 2020.
While oil production in the US will rise from now and until September, we have revised down our growth expectations due to low frac activity and natural decline. Production is estimated to bounce back toward the 11 million to 11.2 million bpd range and then degrade towards 10.7 million bpd again in 4Q20 and 1Q21 as the current activity level is insufficient to offset the natural base decline.
In addition, we revised down Iraqi oil production by about 200,000 bpd as the country makes good on its promise to make up for past missed OPEC+ compliance. Country-wide production will drop to 3.8 million bpd in Jul-20, we forecast, compared to our initial view that its output would struggle to get below the 4 million bpd barrier. We expect to see Iraq oil production capped below 4 million bpd through October but then will see output gradually increase again.
“We doubt that the market can take the additional production volumes from OPEC+ from August without negative consequences for oil prices, as the new glut will likely cancel some of the gains that led Brent to post Covid-19 highs of about $44 this month,“ Tonhaugen concludes.
Our balances suggest that OPEC+’ tapering plans to year-end may need to be put on hold if the goal is to sustain the oil price recovery. This can of course still happen, perhaps already in a month, as OPEC’s market monitoring committee will be reassessing the market on a monthly basis.
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