After a short rebound from mid October to November, international crude oil prices fell again in early December. The main reason is that the market generally expects that the international crude oil market will still be oversupplied in 2020, especially the global crude oil production will maintain rapid growth, while the demand will continue to be weak.
An important recent event is the meeting of the organization of Petroleum Exporting Countries and its allies (OPEC +) in Vienna from December 5 to 6 to discuss whether to extend the production reduction agreement and whether to expand the production reduction. In fact, the key issue of OPEC meeting is not whether OPEC will reduce production or not, but the extent and implementation path of production reduction. If the intensity of production reduction is expanded, the pressure of excess supply in the crude oil market will be relieved to some extent; if the agreement of production reduction is not extended or even if the existing agreement of production reduction is extended, the crude oil market still faces the pressure of excess supply.
From the supply side, on July 1, 2019, OPEC + agreed to extend the production reduction to March 2020, which made the global crude oil market appear a certain amount of inventory removal, but the supply is still surplus. However, the international crude oil market still benefits from OPEC + production reduction to some extent, which makes the decline of WTI crude oil price basically stop at $50 / barrel, not approaching the $45 / barrel set in December 2018 again.
Shale oil is still the key to the global oil supply in 2020, and the market generally expects that the shale oil production in the United States will increase in 2020. According to the data, shale oil production in the United States has exceeded 9 million barrels / day, while the overall crude oil production in the United States is about 12.9 million barrels / day. Although the number of shale oil rigs in the United States has declined significantly since 2014, the production of shale oil in the United States has not declined significantly. Shale oil producers in the United States try to continue to increase production with fewer drilling platforms. The main logic lies in the improvement of drilling efficiency and the explosion of oil storage wells in the Central Plains during the drilling process. At present, more than 70% of the crude oil resources in the United States are from shale oil, and the marginal cost is estimated to be about $50 / barrel. Therefore, if the WTI crude oil price is more than $50 / barrel, the shale oil production in the United States is unlikely to decline actively.
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In addition, the output of emerging crude oil producers is likely to grow explosively, with increases coming from Brazil, Canada, Norway and Guyana. It is estimated that by 2020, the above four countries will increase production by nearly 1 million barrels per day, and by 2021, they will increase production by nearly 1 million barrels per day. Such an imminent supply explosion could be an important reason for Saudi Arabia’s oil giant, Aramco, to rush ahead with its IPO plans. By country, in May 2019, Exxon Mobil announced that it would approve its huge Guyana development project with a second phase investment of US $6 billion. With the approval of Liza phase 2 project (the first phase will go online in early 2020), Exxon Mobil expects to produce more than 750000 barrels of oil per day in Guyana by 2025, which is almost equivalent to the total global oil and gas production of Exxon Mobil 20%; in September 2019, Norwegian national oil company equinor announced two offshore oil fields in the North Sea to produce and sell oil, among which the mariner oil field in the UK sea area has been started in the middle of August this year, and as the largest oil field discovered in the North Sea in nearly 30 years, the Sverdrup oil field in the Norwegian Sea area was put into production in October this year; on November 6, 2019, Brazil launched the so-called The world’s largest offshore oil and gas development project, which covers four platforms, is expected to have reserves of 6 billion barrels of oil equivalent.
Most importantly, it may be difficult for OPEC + meeting in Vienna on December 6 to have a more than expected production reduction agreement. OPEC, led by Saudi Arabia, is not only hit by weak demand, but also facing the rise of the US, which has transformed its customers into competitors. Russia, an OPEC ally, has been producing more than the OPEC + target since August. Russia’s crude oil and condensate production in November once again exceeded the target set by the OPEC + agreement, totaling 46 million tons, equivalent to about 11.24 million barrels per day.
Many oil producing countries, such as Russia and Iraq, have not strictly complied with the production reduction agreement and have been producing beyond the quota. Most of the time, Saudi Arabia cut production beyond the quota, making greater sacrifices to maintain the reduction agreement. There has been a conflict of interest between the two groups. In recent days, Saudi Arabia seems to be reluctant to over implement the production reduction, and may urge countries to strictly implement the production reduction agreement. However, Russia is still trying to reduce the restriction of the agreement on production reduction on its crude oil production, hoping to exclude the condensate production from the production reduction index, and emphasizing that it is difficult for Russia to complete the production reduction in winter.
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Global crude oil demand is relatively weak. Data shows that from June to August, the demand of the world’s 18 largest crude oil consumers increased by only 1.6% compared with the same period last year. In addition to China, the demand of the other top 17 countries fell by 0.9% in June August compared with the same period last year, which is better than a few months ago, but still weak.
Looking back at the impact of OPEC + production reduction on the crude oil market since 2016, we find that the marginal utility is getting lower and lower. Even if the OPEC + meeting in Vienna prolongs the time of production reduction, but the intensity of production reduction is not increased, the crude oil price will be limited to be boosted, which is likely to maintain a low level operation.
In order to predict the probability of OPEC + Vienna production reduction and the intensity of production reduction, the CME OPEC watch tool newly launched by Zhishang Institute shows that the probability of maintaining the current production reduction is 73.21%, while the probability of expanding the production reduction is only 15.26%. CME OPEC watch tool uses WTI crude oil option market price data to calculate the implied probability of OPEC event results. The three results are summarized as “increase output”, “maintain output reduction” and “further reduce output”. Then, the tool assigns a probability to each result calculated using the latest weekly and monthly option expiration.
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