The market could be quite tight in the first half of 2019 but oversupplied again by 2020, according to a new industry note from Jefferies, which was sent to Rigzone on Thursday.
“The combination of OPEC+ cuts, curtailments in Canadian production and further sanctions-related declines in Iranian exports should be sufficient to drive OECD inventories back below their trailing five-year average during 1H19,” the note stated.
“The market could be quite tight and the forward curve could very well shift into backwardation. We estimate the market will be undersupplied by 800,000 barrels per day in 1H if OPEC adheres to its production targets,” the note added.
Jefferies warns in its note however that U.S. growth looms.
“U.S. growth will almost inevitably re-accelerate in 2H19 as incremental pipeline capacity is installed in the Permian Basin. This means that by early 2020 the market could move back into oversupply,” the note stated.
“By 2020 the Saudis would need to reduce their production to 9.2 million barrels per day to keep the market in balance. We are thus lowering our Brent price forecast to $65.75 per barrel from $75.00 per barrel in 2019 and to $62.75 per barrel from $70.00 per barrel in 2020,” the note added.
OPEC+ production cuts are effective as of January 2019 for an initial period of six months. The contributions from OPEC and non-OPEC will correspond to 800,000 barrels per day and 400,000 barrels per day, respectively.
The next OPEC and non-OPEC ministerial meeting is scheduled to convene in Vienna, Austria, in April next year.
OPEC was described as “alive and well and highly relevant” following the announcement of its latest output cut deal in a Fitch Solutions Macro Research (FSMR) report. FSMR is forecasting Brent to average $75 per barrel next year.
Wood Mackenzie’s Vice President of Macro Oils, Ann Louise Hittle, believes a production cut of 1.2 million barrels per day would tighten the oil market by the third quarter of 2019 and cause prices to rise back above $70 per barrel for Brent.