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13 November 2019
BUSINESS

OPEC+ risks oil slump below $50 without deeper supply curbs

According to the International Monetary Fund, Saudi Arabia, the oil group’s biggest member and one of its richest, requires a price of $84 a barrel to finance government spending.

BLOOMBERG/SIMON DAWSON


The Organisation of Petroleum Exporting Countries (OPEC) and its partners are showing no impetus for stronger action to support oil prices ahead of their meetings, however, without intervention, some influential forecasters say a new supply glut could send the market crashing early next year, reported Bloomberg.

According to Morgan Stanley, crude prices, trading at about $62 a barrel in London, may tumble almost 30 per cent to $45 a barrel if the oil trading group and its allies do not announce deeper production cutbacks. Citigroup and BNP Paribas predict a slide to the low $50s.

That would intensify the strain on group members like Venezuela, Iran and Iraq which are already reeling from economic crises and political unrest. It would also ripple through the rest of the industry, hitting the shale boom that has transformed the US into the world’s biggest oil producer.

Martijn Rats, Global Oil Strategist at Morgan Stanley, said, “The prospect of oversupply looms over the market in 2020, either OPEC deepens its cuts or prices will fall to about $45 a barrel and force a slowdown in US shale that balances the market.”

Oil supplies from outside OPEC are set to expand twice as fast as global demand next year, as a fragile economy crimps consumption while new supplies flood in from the US, Norway and Brazil. If Saudi Arabia, Russia and others who reined in production this year do not deepen the cutbacks when they meet in December 2019, prices will almost certainly weaken.

While OPEC Secretary-General Mohammad Barkindo said the group and its partners are prepared to do ‘whatever it takes’ to prevent another rout, delegates say that the biggest producers in the coalition aren’t pushing for further reductions.

The Saudis appear to have little appetite for further sacrifices. The Kingdom had already cut output more than twice as deep as initially foreseen in October 2019, while others in the alliance—particularly Iraq—have not delivered on their commitments. Russia faces less budgetary pressure than its OPEC counterparts and thus less urgency to act.

Maintaining the current level of cuts could be the right call if recent optimism about 2020 proves correct. Barkindo signalled last week that the pressure on the organisation to intervene has abated, as the outlook next year is ‘brighter’ because of surprisingly robust economic growth and thawing of the US-China trade war.

The downturn that may ensue if OPEC does not redouble its efforts could be acutely painful for many of the group’s members.


RELATED STORIES: US-CHINA TRADE TENSION OIL PRODUCTION CUTS OPEC+


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