Oil prices forecast to fall southwards to about $40 per barrel in 2020, without output cuts

It’s bad news for Nigeria and other OPEC countries and Russia as they meet in Vienna on 5 December to discuss output levels for next year.

The market forecast for next year is grim: unless OPEC countries agree to cuts in output, prices could go southwards to as low as $40. Making the forecast is Rystad Energy as it predicts a substantial build of global crude stocks and a corresponding drop in oil prices, if output cuts are not agreed.

“We have a clear message to the OPEC+ countries: A ‘roll-over’ of the current production agreement is not enough to preserve a balanced market and ensure a stable oil price environment in 2020,” says Bjørnar Tonhaugen, head of oil market research at Rystad Energy.

“The outlook will be bleak if OPEC+ fails to agree on additional cuts.”

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And it also spells bad for Nigeria if prices fall below $57, the benchmark for the 2020 budget. Facing severe cash-crunch, Nigeria is betting on oil income flow to implement the budget of N10.3trillion($28billion).

According to Rystad Energy’s estimates, the global oil market will be fundamentally oversupplied to the tune of 0.8 million barrels per day (bpd) in the first half of 2020.

Empirical evidence has demonstrated that a 1 million bpd surplus of oil can be expected to cause an oil price decline of around 5% per month, implying a potential drop of 30% over six months.

“If OPEC and Russia don’t extend and deepen their cuts, we could see Brent Blend dip to the $40s next year for a shorter period,” Tonhaugen said.

“In order to ensure a balanced market, our research indicates that OPEC would need to reduce crude production to 28.9 million bpd – a drop of 0.8 million bpd from the level seen in the fourth quarter of 2019-levels – given our forecast for demand, non-OPEC supply and the impact of new IMO 2020 regulations on global crude runs,” Tonhaugen added.

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“Despite decent cut compliance from the group as a whole and large involuntary declines in Iran and Venezuela this year, OPEC’s current crude production of about 29.7 million bpd is far above the ‘call’ for 2020. Alas, without deeper cuts taking effect in January 2020, large global implied stock builds are on the cards,” Tonhaugen remarked.

Rystad Energy sees three alternative OPEC+ decision scenarios:

**Base case: Extension of current production cuts to June 2020. Global oil market will be oversupplied to the tune of 1.2 million bpd in 2020. Significant oil price correction, possibly down to the low $40s for a short period, is likely.

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**Deeper cuts: Additional cut of 0.75 million bpd on top of the 0.3 million bpd in the extension scenario would reduce the supply overhang and ensure stable prices.

**No deal/market share war: A ramp-up to maximum production capacity in all countries could have devastating effects. With potential stock builds of 2.3 million bpd, oil prices could fall below $30/bbl – lower than during the previous lows of 2016. Such a scenario would be devastating for the forward curve structure as potential stock builds would be larger than what we have observed historically

*Adapted from a report by oilprice.com