Abu Dhabi, UAEThursday 22 October 2020

What's in store for Opec+ in 2020

The alliance led by Saudi Arabia and Russia will begin the new year implementing production cuts of 2.1 million bpd

Saudi energy minister Prince Abdulaziz bin Salman flanked by Venezuelan oil minister Manuel Quevedo, left, and Russian energy minister Alexander Novak at Opec's annual meeting in Vienna in December. REUTERS
Saudi energy minister Prince Abdulaziz bin Salman flanked by Venezuelan oil minister Manuel Quevedo, left, and Russian energy minister Alexander Novak at Opec's annual meeting in Vienna in December. REUTERS

Opec, in its third year of alliance with non-member producers led by Russia, will have to brace for a challenging 2020 with slowing crude demand as well as trade war uncertainties that continue to weigh on prices.

The alliance, known as Opec+, which was first forged in Algiers in 2016, has weathered several storms together – US dominance of the global energy landscape as the top producer, geopolitical risks in the Middle East and waning demand for crude and by-products from traditional drivers of growth such as China.

Unlike 2018, when Opec acquiesced to the US demand to boost production and keep prices moderate, this year the alliance maintained an output draw of 1.2 million barrels per day since January.

The production cuts, under the joint Saudi-Russian leadership, have contributed to a level of stability in the oil markets, which have otherwise been roiled by escalations in the trade dispute between the US and China that dampened economic growth in 2019.

The impact led to the World Bank and International Monetary Fund to revise their projections on the global economy to be lower.

The oil allies will begin the new year with deeper cuts. Saudi Arabia, which had a change of guard with Prince Abdulaziz bin Salman stepping in to lead the energy ministry, will contribute with additional voluntary restrictions to balance the markets.

Around 2.1 million bpd will be drawn from the markets starting January, with Saudi Arabia making 400,000 bpd of cuts. While Riyadh has promised to go the extra mile, the kingdom signalled it will not tolerate violations of the pact from repeat offenders in the group – notably, Iraq and Nigeria – who have consistently produced above their quotas.

“We expect fairly strong overall Opec non-Opec compliance next year,” said Vandana Hari, founder and chief executive at Vanda Insights based in Singapore. “The new Saudi Energy Minister Prince Abdulaziz bin Salman has signalled a zero tolerance policy with quota-busters,” she added.

The consultancy, which has forecast Brent to range between $60 and $70 per barrel in 2020, said Opec+ was key to balancing the market.

For oil to reach the higher end of the projected range, all punitive import tariffs levied on each other by Beijing and Washington need to be completely lifted.

The world’s two biggest economies have reached a “phase-one” trade deal, with the US halting plans to levy 15 per cent import tariffs on $160 billion worth of Chinese goods from this month. Beijing for its part has agreed to purchase up to $50bn worth of American agricultural goods.

However, de-escalation in the trade discord, which could rally prices, may bode poorly for Opec+ producers, leading then to an influx of US shale, which by the end of this year will have topped 13 million bpd.

“It is hard to envisage levels above $70 for Brent, because it would likely spur Trump to bear down on Opec+ ... to pump more and cool down the prices,” says Ms Hari.

Investment bank Goldman Sachs meanwhile, expects oil prices to average $63 per barrel for Brent in 2020, with West Texas Intermediate likely to average $58.50 per barrel. Swiss investment bank UBS expects Brent to average $58 per barrel in the first quarter of next year and then pick up to $60 per barrel towards the end.

“We continue to see the oil market oversupplied in the first half of 2020. As such, compliance disappointments of previous laggards could see oil prices coming under pressure again in the future,” said Giovanni Staunovo, commodity analyst with the Swiss lender.

“With the oil market expected in balance in the second half, we see oil prices recovering in the second half from a first-half weakness,” he added.

However, others such as the Institute of International Finance in Washington, offer a more sober assessment, noting the rally prompted by the partial truce in the trade conflict may only be “short-lived”. The institute expects Brent to average $60 per barrel in 2020, with demand growth for crude to decline to 1 million bpd.

Updated: December 23, 2019 02:28 PM

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