OPEC strategy shift, COVID-19 might lead to global rise in oil inventory

Markets for oil and other commodities and equities have experienced volatility and price declines since the final week of February amid concerns related to the economic effects of the coronavirus disease, or COVID-19, according to the U.S. Energy Information Administration (EIA). Meanwhile, markets declined after the Organization of the Petroleum Exporting Countries (OPEC) and partners couldn’t agree to continue to cut crude oil production.

The EIA provided analysis on how lifting the production cuts might affect global oil balances and prices.

International benchmark Brent crude oil prices were expected to fall about $21 per barrel to an average of $43 per barrel in 2020, from 2019. Prices were projected to be an average of $37 per barrel in the second quarter and rise to $43 per barrel in the second half of the year. Brent prices are expected to increase to an average of $55 per barrel in 2021 as declining global oil inventories put upward pressure on prices. Global liquid fuels inventories are projected to rise by an average of 1 million barrels per day in 2020 after falling by about 100,000 barrels per day in 2019. The inventory builds will be the largest in the first half of 2020, rising at a rate of 1.7 million barrels per day.

After OPEC’s March 6 meeting, it and partner countries announced they didn’t agree to extend production cuts beyond those expiring March 31. OPEC and these countries have been limiting production since December 2016. With the production cuts expiring, the EIA increased its forecast for OPEC liquid fuels production by 150,000 barrels per day in 2020 and by 200,000 barrels per day in 2021. Crude oil production from OPEC is expected to rise to an average of 29.1 million barrels per day in the second and third quarters of 2020, up from 28.7 million in the first quarter. The rise is small in a market where global production exceeded 100 million barrels per day in 2019 but is a change from recent production targets that had kept global inventories near the five year (2015-19) average.

OPEC looks to regain market share by increasing production to the point that the resulting decline in prices limits production growth from other market participants, such as non-OPEC producers, according to the EIA. The rise in OPEC production is meaningful with regard to the downward revisions for global demand projections as a result of COVID-19.

OPEC production levels are no longer expected to follow changes in demand and non-OPEC supply to maintain global inventories in line with the five-year average. The EIA expects the rise in OPEC production levels will lead to inventory builds through 2020. Production levels that OPEC looks to reach are uncertain when oil demand is low, and the amount OPEC produces is expected to have an impact on crude oil prices. OPEC could produce more than existing projections because its surplus capacity is more than 2 million barrels per day, according to the EIA. If OPEC uses its surplus production, this would lead to larger inventory builds and put downward pressure on prices.

However, production outages could lead to reduced supply and put upward pressure on prices. In Libya, production has fallen by 1 million barrels per day since December, and production was an average of 150,000 barrels per day in February. Unplanned production outages from OPEC were an average of 3.84 million barrels per day in February and included outages in Iran, Kuwait, Nigeria and Saudi Arabia.