Plans by OPEC+ members to further cut their crude oil production should support prices in the first quarter of 2020, but a failure to extend the cuts beyond March 2020 and the possibility of a ramp-up in Saudi Arabia's oil output pose risk to full-year 2020 price support, analysts said.
OPEC+, an alliance of OPEC members plus Russia and other nations, on Dec. 6 announced an agreement to lower targeted production by an additional 500,000 barrels per day through the first quarter of 2020.
In actuality, with a pledge from Saudi Arabia to continue to overcomply with its official target by about 400,000 bbl/d, the total supply reduction would equate to an estimated almost 600,000 bbl/d compared with the group's average output over the first 10 months of 2019, Barclays analyst Amarpreet Singh said in a Dec. 6 note.
For the first quarter of 2020, Barclays said there is upside risk to its crude oil price forecast, which calls for $65 per barrel Brent and $60/bbl West Texas Intermediate.
Full compliance with the new quotas in the first quarter of 2020 would significantly increase the supply deficit, which Barclays estimated Nov. 12 at 200,000 bbl/d. But the group will need to maintain the same output level for the rest of the year to offset builds from the second through third quarters, Singh said.
OPEC's failure to expand the cuts beyond March 31, 2020, "is concerning," as the extension of the cuts will depend to a large extent on how well OPEC and its partners address the "inevitable non-compliance by some members," the analyst said.
Jefferies analyst Jason Gammel said Dec. 5 that Saudi Arabian production averaged 9.9 million bbl/d through September, which is 400,000 bbl/d below its target.
"A scenario where the Saudis 'absorb' the majority of a [500,000 bbl/d] cut and formalize their target at current output levels would not be impactful to the market — unless Iraq and Nigeria come into compliance with their targets as a quid pro quo," Gammel said. "Their compliance would remove about [400,000 bbl/d ] from the market."
Saudi Arabia threatened to increase its production should other countries fail to comply with quotas, and that "may be sufficient to bring them to heel," Gammel said.
Still, the risk of poor compliance by Iraq, Nigeria and Russia cannot be ruled out, Goldman Sachs analyst Damien Courvalin said in a Dec. 6 note.
Courvalin said OPEC's decision to make larger production cuts instead of extending the duration of the current cuts, along with Saudi Arabia's threat to increase output should other countries not comply, imply a change in behavior for the cartel and its members.
He said if OPEC succeeds in implementing this shift from attempting to correct perceived long-term imbalance through open-ended commitments to managing short-term physical surpluses and deficits, it will likely roll forward the strategy when it meets on March 5-6, 2020. At that time, quotas would be adjusted to the actual observed balance of the oil market, Courvalin said.
Steady U.S. shale production growth will combine with lower OPEC+ production to tighten the supply-demand balance, the Goldman Sachs analyst said.
Goldman Sachs revised higher both the spot Brent and spot WTI crude oil prices from its previous forecast of $60/bbl and $55/bbl, respectively, to $63/bbl and $58.50/bbl. Despite the higher price outlook, U.S. shale gas production growth will hold at 600,000 bbl/d, Courvalin said.
"Poor financial performance, excess leverage, and an increased focus on emissions have pushed the cost of capital of shale oil producers sharply higher. Importantly, this pressure is no longer delivered by oil prices like in 2015-16 but by equity and debt markets," the Goldman Sachs analyst said. "As such, we expect the recent shale restraint to persist even at moderately higher prices."
"It is becoming increasingly evident that U.S. oil producers will take a cautious stance on 2020 capital spending," Raymond James analyst John Freeman said Dec. 9.
Based on its rig count assumptions, and accounting for the continuing slowdown in U.S. well productivity growth, Raymond James' production-by-play model yields liquids production growth of 400,000 bbl/d in 2020, down from 430,000 bbl/d in its October model, Freeman said.
Raymond James lowered its 2020 WTI and Brent crude oil price forecasts by $5/bbl each to $65/bbl and $70/bbl, respectively. The price outlooks are still well above consensus and futures strip prices, and the analysts still anticipate oil price strength in the second half of 2020 but see the cyclical high for prices more likely occurring in 2021. Raymond James initiated forecasts of $75/bbl for WTI and $80/bbl for Brent crude oil in 2021.