OPEC cuts global oil demand forecast

On November 5, the organization of Petroleum Exporting Countries (OPEC) lowered its forecast of global oil demand in the medium and long term, and predicted that its oil supply will continue to decrease in the next five years. This led to further speculation that OPEC and its allies may continue to cut production at their December meeting to help stabilize the market.


Demand worries


OPEC released its 2019 world oil outlook report on November 5, which lowered its forecast of global oil demand in the medium and long term in the future. It is estimated that the global average oil demand by 2040 will be 110.6 million barrels per day, 1.1 million barrels less than the forecast in 2018.


According to the report, the world’s main energy demand will continue to grow in the future, and oil will remain the main energy source. According to the report, renewable energy such as solar energy, wind energy and geothermal energy will be the fastest growing energy demand between 2018 and 2040, with an average annual growth rate of 6.9%. Driven by factors such as reduced battery costs and policy support, the electric vehicle market will develop rapidly in the future, and it is expected that nearly half of new passenger vehicles in OECD countries will be electric vehicles by 2040, the report said.


The outlook for oil demand this year and next is not optimistic. In its latest monthly report, the International Energy Agency recently cut demand growth by 100000 barrels a day in 2019 and 2020. Oil demand is expected to grow at a “steady” rate of 1.2 million barrels per day in 2020, the IEA said in its report.


For months, concerns about global economic growth and energy demand have struggled to subside. New durable goods orders fell 1.1% on month in September. The IHS Markit German manufacturing PMI index rose to 41.9 in October from a 10-year low of 41.7 in September, but is still in recession. All of these data show that large economies are at risk of slowing economic growth.


Concerns that trade frictions could threaten growth prospects are also hard to dissipate. Market expectations for positive progress in China US economic and trade negotiations continued to push up oil prices, with international oil prices rising Friday. Light crude oil futures for December delivery on the New York Mercantile Exchange rose $0.69 to $57.23 a barrel, or 1.22%, at the end of the day. London Brent crude oil futures for January 2020 delivery rose $0.83 to $62.96 a barrel, or 1.34%.


No change in oil production


Under the situation of poor demand prospect, global oil production is still increasing. Some analysts pointed out that due to the increase of shale oil production in non OPEC countries such as the United States, the global oil supply is still growing this year, and Brazil and Norway are expected to produce more oil next year.


In September, Saudi Arabia’s oil facilities were attacked by drones, causing its oil production to halve at one time, but then quickly recover. OPEC’s oil production in October rebounded from an eight year low, with 14 member countries producing an average of 29.7 million barrels of oil a day in October, an increase of 1.11 million barrels a day over September, according to Bloomberg News Agency.


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According to the recent report of Austria JBC energy, in addition to the countries and regions participating in the OPEC production reduction agreement, the production of crude oil and condensate in non OPEC countries will increase by about 1.5 million barrels / day in 2020. JBC energy expects that, due to the slowdown of upstream investment, the shale oil production in the United States will increase or be less than 800000 barrels / day in 2020, lower than that in 2019, but the production in Brazil, Norway and Canada will still maintain a rapid growth.


In a recent report, Goldman Sachs said that the growth rate of U.S. oil production will slow down next year, but shale oil production in the Permian Basin will still account for an increasing proportion of oil supply growth in non OPEC oil producing countries. According to Goldman Sachs, U.S. oil production will increase by 1.1 million barrels per day this year and 700000 barrels per day in 2020. Goldman Sachs said the expected decline in oil production could be due to a decrease in shale oil and gas drilling activities, as well as a faster decline in oil field production. Goldman Sachs expects production in the Permian Basin to increase by 800000 barrels a day this year, accounting for 42% of the increase in non OPEC oil production.


According to US media reports, the Permian Basin in West Texas has become an important production center of shale oil, and technological progress has enabled enterprises to exploit at a lower and lower price and obtain rich profits. ExxonMobil said shale oil production in the Permian Basin is growing significantly, with an average return of 10% even at $35 a barrel, and plans to produce more than 1 million barrels a day in the basin by 2024.


It is pointed out that the increasingly profitable shale oil production and the global demand for light crude oil and gasoline may make the United States dominant in the oil industry in the next few years.


OPEC may take the initiative to reduce production


OPEC and non OPEC oil producing countries will meet in early December to discuss whether to continue the current production reduction agreement or further curb production. OPEC and other oil producing countries, including Russia, have cut production by 1.2 million barrels a day since January to support the market, and extended the cut-off agreement to March 2020 in July.


OPEC also said Friday it expects its oil supply to continue to decline in the next five years. OPEC data shows that the international crude oil market will face oversupply in 2020 due to the increase of non OPEC oil production. This shows that OPEC may need to further reduce production to stabilize oil prices in response to the growth of US crude oil production and weak global demand.

Analysts said OPEC should take the initiative to cut production in order to prevent further decline in oil prices and lagging policy transmission, given that the demand outlook is likely to worsen in 2020. For a long time, OPEC has been in a state of passive production reduction, that is, when there is an obvious oversupply in the market, it will reduce production to balance the oil price.


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Keisuke sadamori, director of energy market and security of the International Energy Agency, said Friday that the oil market is expected to face oversupply in 2020 due to weak demand growth and increased oil production. Concerns about the global macro-economy and the development of brexit are putting pressure on the outlook of the oil market.


But OPEC Secretary General Mohammed barjindo said Friday that he is optimistic about the trend of international oil prices next year. He said some non fundamental news was also more optimistic, such as the development of the trade situation. Barjindo also said Friday that he welcomed Brazil’s consideration of joining OPEC.


Brazil’s president, YAIL Messias bosonaro, last month expressed his intention to join the OPEC. The news means Brazil could become the heaviest oil producer to join OPEC in recent years. Bosonaro claims that Brazil’s oil reserves are richer than some OPEC member countries and it is becoming the sixth largest oil producer in the world. Joining OPEC will help stabilize the global market. But some in Brazil’s oil industry question whether it should join, saying joining OPEC may mean cutting production.


According to the International Energy Agency, Brazil is significantly increasing offshore oil and gas production, with daily crude oil production surging 220000 barrels in August to a record 3.1 million barrels, more than 10% of OPEC’s current total production. If we join OPEC, Brazil will become the third largest oil producer in the organization, after Saudi Arabia and Iraq.