Oil could fall below $40 unless OPEC deepens cuts: Report

Crude oil prices are expected to plunge to $40 a barrel in 2020 unless OPEC and Russia agree to deepen – and not just extend – their production cuts, according to a new report from the Norwegian research firm Rystad Energy.

The Organization of the Petroleum Exporting Countries and their allies, led by Russia, are meeting Thursday and Friday in Vienna to consider either extending or deepening current production cuts that are designed to keep the global oil markets and crude prices steady. The other option is that the so-called OPEC+ group could opt to punt on a decision until next year before the existing agreement expires after March.

But Rystad warns that simply extending the existing cuts isn’t enough as the global oil demand growth slows and crude output rises in countries, including the United States, Norway, Brazil, Guyana and others.

“We have a clear message to the OPEC+ countries: A ‘roll-over’ of the current production agreement is not enough to preserve a balanced market and ensure a stable oil price environment in 2020,” said Bjørnar Tonhaugen, Rystad’s head of oil market research. “The outlook will be bleak if OPEC+ fails to agree on additional cuts.”

Rystad estimates the global oil market is on track to be oversupplied by 800,000 barrels of oil per day in the first half of 2020. So that’s the amount by which OPEC+ must deepen its cuts, Rystad said. The world consumes more than 100 million barrels of crude per day.

Rystad contends that a surplus of 1 million barrels a day can cause oil prices to decline 5 percent per month, or 30 percent over six months. And a 30 percent drop of the U.S. oil benchmark – currently at about $55.50 per barrel – would push prices below $40 per barrel. That’s a threshold below which barely any oil producers can profit.

OPEC’s largest player, Saudi Arabia, is leading the push for deeper cuts, especially as it complains that other OPEC nations and allies are cheating on their reduction agreements. The Saudis also want stability for their limited public offering of the state oil giant Saudi Aramco. But there’s been pushback from Russia, Iraq, Nigeria and others that are less eager to further pull back on their production.

“Saudi Arabia has signaled that it seeks stricter compliance by other producers and is no longer willing to shoulder the burden of sub-compliance by others, such as Russia, Iraq and Kazakhstan, which have all failed to reach 100 percent compliance with their target cuts,” Tonhaugen said.