Shared from the 12/5/2019 Houston Chronicle eEdition

Crude prices hang in the balance as OPEC+ meets

Bloc’s decision comes as energy sector faces job cuts, stock losses

Karim Sahib / AFP/Getty Images

When OPEC meets later this week, the question is whether the cartel and its allies will cut production further.

The fate of crude oil prices and the health of the U.S. energy sector heading in 2020 may be determined this week in Vienna when OPEC and its allies meet to determine whether to extend or deepen production cuts that have kept the market from crashing.

With crude supplies expected to keep outpacing waning demand growth in the months ahead, inaction from OPEC or even a decision to extend the existing cutbacks could send oil prices plunging toward $40 a barrel by mid-2020, a level at which few U.S. companies could make money and likely leading to layoffs in Houston and across the industry. With prices stuck in the $50-to-$60 range, energy companies already are cutting back and eliminating jobs.

Some analysts predict that the Organization of the Petroleum Exporting Countries, Russia and other allies will agree to cut output beyond the 1.2 million barrels a day reduction they approved last year and extended in the summer, perhaps by as much as an additional 1 million barrels a day. But even that might not be enough to offset new production, shrink global supplies and keep prices from diving to $40 a barrel by spring, said Paul San-key of Mizuho Securities.

And he’s not alone in that thinking.

“Even if they layer on additional cuts, it likely won’t be enough to stimulate a paradigm shift in the market's view ofoversupply,” said Ethan Bellamy, an energy analyst at the financial services company Robert W. Baird & Co. “On the other hand, if OPEC undershoots and comes out too dovish, the bottom could drop out of oil quickly.”

Output doubles

The OPEC+ alliance kicks off its semi-annual meeting Thursday. The cartel has been forced to adopt production cuts to try to offset the vast amounts of crude flowing from U.S. shale oil fields, particularly the Permian Basin in West Texas, and avoid the price crash of five years ago that led to the worst oil bust in a generation.

U.S. crude output has more than doubled from 5.7 million barrels a day in 2011 to a current estimate of 12.8 million barrels daily. Shale production will keep rising — albeit at a slower pace — at least through 2020, if not longer, according to U.S. Energy Department forecasts.

And new supplies are coming online from other countries, including Norway, Guyana and Brazil. After starting up in October, oil production from the Norwegian North Sea’s giant Johan Sverdrup field has risen to nearly 400,000 barrels a day. Exxon Mobil will soon begin producing up to 120,000 barrels of oil per day offshore of Guyana as the tiny South American nation becomes a significant oil producer.

All told, the Norwegian consultancy Rystad Energy estimates, global production outside of OPEC will jump by a record 2.25 million barrel of oil per day in 2020, more that double the anticipated growth in worldwide demand. Energy demand has softened with the slowing global economy, adding to fears of another crude oil glut and freefall in oil prices.

The efforts to better balance supply and demand have been led by Saudi Arabia. Within the OPEC+ group, the Saudis have carried the heaviest load of the production cuts and likely will have to do even more going forward. Although its quota is 10.3 million barrels a day, Saudi Arabia has held its production just below 10 million barrels a day for most of this year.

Saudi’s new oil minister, Prince Abdulaziz bin Salman, meanwhile, is expected to decry a lack of compliance with agreed-upon production quotos by other countries. Russia, Iraq, Nigeria and Kazakhstan have all cheated and produced extra oil supplies in recent months, according to government and industry estimates.

The OPEC meetings also coincide with the Saudis launching a limited initial public offering of the massive state energy company, Saudi Aramco. Higher oil prices are desired by the Saudi government to boost the price of the stock that is going up for sale.

Bleak outlook

Most analysts expect OPEC and its allies to simply extend the current quotas beyond their March expiration date. Such a decision could cause crude prices to fall by 5 percent a month through mid-2020 — a cumulative 30 percent drop that could push oil prices even below $40 per barrel, according to Rystad.

Rystad estimates the global oil market is on track to be oversupplied by 800,000 barrels of oil per day in the first half of 2020. So OPEC+ would have to deepen its cuts by at least that much to keep oil supplies from growing and prices from sliding, Rystad said. The world consumes more than 100 million barrels of crude per day.

“We have a clear message to the OPEC+ countries: A rollover of the current production agreement is not enough to preserve a balanced market and ensure a stable oil price environment in 2020,” said Bjørnar Tonhaugen, Rystad’s head of oil market research. “The outlook will be bleak if OPEC+ fails to agree on additional cuts.”

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