After a brief rebound from mid-October to November, international crude oil prices fell again in early December. The main reason is that the market generally expects that the international crude oil market will still be oversupplied in 2020, especially as global crude oil production will remain relatively high. growth, while demand continues to be weak.
A recent important event is the announcement by the Organization of the Petroleum Exporting Countries and Allies (OPEC+) on December 5 A meeting will be held in Vienna on the 6th to discuss whether to extend the production reduction agreement and whether to expand production cuts. In fact, the key issue at the OPEC meeting is not whether OPEC will reduce production, but the extent and implementation path of the reduction. If the intensity of production cuts is expanded, the oversupply pressure on the crude oil market will be alleviated to a certain extent; if the production reduction agreement is not extended or even if the existing production reduction agreement is extended, the crude oil market will still face oversupply pressure.
In order to predict the probability and intensity of OPEC+ Vienna production cuts, the latest CME OPEC Watch Tool launched by CME Group shows that the probability of maintaining the current production cuts is 73.21%, while expanding the production cuts The probability is only 15.26%. The CME OPEC Watch Tool uses WTI crude oil options market price data to calculate the implied probability of the outcome of the OPEC event. The three outcomes are summarized as “increase output”, “maintain output cuts” and “further cut output”. Then, the tool is Each outcome is assigned a probability calculated using recent weekly and monthly option expirations.
From a supply perspective, on July 1, 2019, OPEC+ unanimously agreed to extend production cuts until March 2020, which caused a certain amount of inventory depletion in the global crude oil market. However, There is still excess supply. However, the international crude oil market has benefited to some extent from OPEC+ production cuts, which has basically stopped the decline in WTI crude oil prices at US$50/barrel, and has not approached the US$45/barrel hit in December 2018 again.
Shale oil will still be the key to global oil supply in 2020, and the market generally expects U.S. shale oil production to grow in 2020. Data show that U.S. shale oil production has exceeded 9 million barrels per day, while overall U.S. crude oil production is about 12.9 million barrels per day. Although the number of U.S. shale oil rigs has dropped significantly since 2014, U.S. shale oil production has not declined significantly. U.S. shale oil drillers are trying to continue to increase production with fewer drilling rigs. The main logic lies in the improvement of drilling rig efficiency and the explosion of crude oil inventory wells during the drilling process. More than 70% of the crude oil resources in the United States now come from shale oil, and the marginal cost is calculated to be about US$50/barrel. Therefore, if the price of WTI crude oil is above US$50/barrel, US shale oil production is unlikely to actively decline.
In addition, emerging crude oil-producing countries may experience explosive growth in production, with additional crude oil coming from Brazil, Canada, Norway and Guyana. It is expected that by 2020, the above-mentioned four countries will increase production by nearly 1 million barrels per day, and by 2021, they will increase production by nearly 1 million barrels per day. This looming supply explosion may be a big reason why Saudi Arabian oil giant Aramco is rushing forward with its IPO plans. In terms of countries, in May 2019, ExxonMobil announced that it would approve a US$6 billion investment in the second phase of its huge Guyana development project. With the approval of the Liza Phase 2 project (the first phase will be online in early 2020), Egypt ExxonMobil expects to produce more than 750,000 barrels of offshore oil per day in Guyana by 2025, which is almost equivalent to 20% of ExxonMobil’s total global oil and gas production; in September 2019, the Norwegian national oil company Equinor announced two Offshore oil fields located in the North Sea produce and sell oil. Among them, the Mariner oil field located in British waters began to start up in mid-August this year. As the largest oil field discovered in the North Sea in the past 30 years, the Sverdrup oil field located in Norwegian waters went into production in October this year. ; On November 6, 2019, Brazil launched what is known as the world’s largest offshore oil and gas development project bidding, which covers four platforms and is expected to have reserves of 6 billion barrels of oil equivalent.
The most important thing is that it may be difficult for the OPEC+ meeting in Vienna on December 6 to produce a production reduction agreement that exceeds expectations. In addition to being hit by weak demand, OPEC, led by Saudi Arabia, also faces the rise of the United States, a customer-turned-rival. Russia, an OPEC ally, has been producing above the target set by the OPEC+ agreement since August. Russia’s crude oil and condensate production in November once again exceeded the target level set by the OPEC+ agreement, totaling 46 million tons, equivalent to about 11.24 million barrels per day.
Many oil-producing countries such as Russia and Iraq have not strictly abided by the production reduction agreement and have been producing in excess of quotas. Saudi Arabia has cut production beyond quota most of the time, making greater sacrifices to maintain the production reduction agreement. There has always been a conflict of interest between these two groups. Recently, Saudi Arabia seems to have shown its unwillingness to over-implement production cuts and may prompt countries to strictly implement production reduction agreements. However, Russia is still trying to find ways to reduce the constraints of the production reduction agreement on its own crude oil production. It hopes to exclude condensate production from the production reduction targets, emphasizing that it will be difficult for the country to complete production reductions in winter.
Global crude oil demand is relatively weak. Data show that from June to August, the demand of the world’s 18 largest crude oil consuming countries only increased by 1.6% compared with the same period last year. Except for China, demand in the other top 17 countries fell by 0.9% from June to August compared with the same period last year, which was an improvement from a few months ago, but stillHowever weak.
Looking back at the impact of OPEC+ production cuts on the crude oil market from 2016 to the present, we find that the marginal utility is getting lower and lower. Even if the OPEC+ meeting in Vienna extends the production cuts, if the intensity of the cuts is not increased, , then crude oil prices will receive limited boost and are likely to remain low.
The picture shows the CMEOPECWatchTool’s calculation of the probability and magnitude of production cuts at the OPEC+ meeting (as of December 4, 2019)</p
