Oil prices could fall into the low $20s for the global market to rebalance, said Rystad Energy, as it expects an increase in global supplies in the next 3 months.
The Organization of the Petroleum Exporting Countries and Russia could add 1.5-2.5 million b/d, estimated by Rystad Energy to be their realistic short-term capability.
After the breakdown in OPEC+ negotiations and subsequent oil price free-fall, Saudi Arabia and the UAE both have signaled their intent to begin flooding the market with additional oil production in April.
“Without OPEC+, the global oil market has lost its regulator and now only market mechanisms can dictate the balance between supply and demand,” said Espen Erlingsen, Rystad Energy’s head of upstream research.
Global liquids demand was reduced by around 4 million b/d in February, Rystad Energy estimates, primarily driven by the coronavirus. Over the coming months, demand may weaken by 2-4 million b/d due to the virus.
The cost of supply curves can help gauge how the market will react to various scenarios, Erlingsen said, and the firm has updated its estimates of the short-run marginal (SRM) cost for the global liquids market.
For conventional fields, the SRM only includes transportation costs, effects of gross taxes, and price differentials to Brent. All other costs, such as production cost and investments, are excluded, as Rystad Energy believes that these costs will not affect production levels from producing fields in the short term.
For tight oil assets, producing wells include the same costs as conventional fields, while the drilled uncompleted wells (DUC wells) also include the costs for completing the wells. For not yet drilled tight oil wells, both drilling and completion costs are included.
The shape of this curve is rather flat, as the SRM for the majority of the oil fields is below $5/bbl. In fact, around 92 million b/d of production has an SRM below $5/bbl. Total production with an SRM cost above $15/bbl is around 4 million b/d.
Rystad Energy estimates that the total demand for liquids will be around 100 million b/d in June 2020, assuming no coronavirus impact.
The cost of supply curve moves to the right if OPEC+ increases production. The equilibrium price moves to $19/bbl from around $25/bbl (no additional OPEC+ supply) in the modest 1.5 million b/d increase scenario and $14/bbl in the large 2 million b/d increase scenario.
If demand weakens by 2 million b/d in June (total demand of 98 million b/d), the equilibrium oil price moves to around $11/bbl from $19/bbl in the modest OPEC+ increase scenario. If demand weakens by 4 million b/d in June (total demand of 96 million b/d), the equilibrium oil price moves down to around $9/bbl in the modest OPEC+ increase scenario.
