If OPEC+ decides to increase production to compete with competitors, it will be the “most extreme situation”. BNP Paribas deduced this scenario, and US oil may plummet to $35 per barrel in the short term...
The possibility of OPEC+'s production decision being delayed until this Thursday to “impact the market” is considered unlikely, but given the history of price wars, traders still need to be wary.
According to Bloomberg on Monday, after Saudi Arabia voluntarily cut production by an additional 1 million b/d from July to the end of this year, the country is now seeking further support from OPEC+ partners to demand that other members of the group reduce production quotas, but some member states have boycotted it. Further production cuts are conducive to tightening the market, and oil prices have been falling since reaching a high level during the year in late September. (Related reading: We can't get along! (Saudi Arabia's pressure on OPEC+ member countries to increase production cuts was boycotted)
Traders can't help but recall that in March 2020, differences over production quotas between OPEC+ member countries Saudi Arabia and Russia triggered a price war, causing the price of WTI crude oil futures to drop by more than 300%, to 37.63 US dollars/barrel by April 2020, the lowest settlement price ever recorded. But that's unlikely to happen this time around.
BNP Paribas analysts wrote in a report on Friday that if OPEC+ decided to confront other crude oil suppliers by “increasing production,” it would be “the most extreme situation.”
They said that under these circumstances, global supply would increase by about 3 million b/d. This is because they expect OPEC's idle production capacity to be around 4.5 million b/d, but let's say the organization wants to keep some of that. At that time, the price of Brent crude oil is expected to drop to 40 US dollars/barrel, causing non-OPEC oil producers to shut down current production.
The following is BNP Paribas's explanation of this “low oil price scenario.”
In the “low oil price scenario,” the economic landing of Europe and the US is more difficult than expected. This will weaken oil demand. Supply from non-OPEC oil-producing countries is rapidly increasing. OPEC unity is “too weak to cut production further.” This situation may cause the price of Brent crude oil to temporarily drop to around $65 to $70 per barrel.
However, BNP Paribas analysts pointed out that when the price of oil falls below $70 per barrel, the demand response will be significant because lower prices will increase demand and reduce the productivity of suppliers.
They also pointed out that the Biden administration has previously stated that after selling 180 million barrels of reserve oil in 2022 to control oil prices, it plans to buy WTI crude oil at a price of around $70 per barrel to supplement the US strategic oil reserves (SPR). Analysts said, “In a low price environment, there is a huge inventory gap that needs to be filled.”
Analysts said that in most cases, demand from SPR should balance the global market, although the timing of the resupply is “difficult.” Since the US will hold a general election in November, they believe that measures to supplement the SPR will only be implemented in the first half of 2024 and after 2025.
For non-OPEC producers, to force them to shut down oil production, the price of Brent crude oil needs to fall below the low of $65 to $70 per barrel predicted by BNP Paribas.
Analysts cited data from Wood Mackenzie as saying that current production in Guyana, Brazil and Canada will be completely shut down when oil prices fall below $35 per barrel. They also said that according to a survey by the Dallas Federal Reserve, the oil price that triggered the shutdown of existing shale oil wells in the US is between 30 and 45 US dollars/barrel, while the threshold for new shale oil wells is higher, between 56 and 66 US dollars/barrel.
BNP Paribas concluded that these factors mean that the price of WTI crude oil needs to reach $35 per barrel in the short term to stop current production in non-OPEC oil producers and rebound to $65 per barrel by 2025 to encourage the emergence of new supplies. Assuming that WTI crude oil has a discount of 4 to 5 US dollars/barrel compared to the global benchmark Brent crude oil, this means that the supply of Brent crude oil will shut down at $40 per barrel and stimulate new supply at $70 per barrel. This is the bank's current “low oil price scenario.”
Despite this, with the addition of SPR and the increase in demand from other industries, BNP Paribas analysts said they do not expect oil prices to remain below the “low oil price scenario” level for more than “about two quarters.”