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Rystad Energy: oil prices could fall into low US$20s

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Oilfield Technology,

Oil prices could fall into the low US$20s for the global market to rebalance, as Rystad Energy expects an increase in global supplies in the next three months. OPEC+ countries are locked and loaded to add between 1.5 million and 2.5 million bpd, which Rystad estimate is their realistic short-term capability.

Rystad Energy: oil prices could fall into low US$20s

After the breakdown in OPEC+ negotiations and subsequent oil price free-fall, Saudi Arabia and the UAE have both signalled their intention to flood the market with additional oil production starting next month.

“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.

Rystad Energy estimates that global liquids demand was reduced by around 4 million bpd in February, primarily driven by the coronavirus. Over the next months, demand might be weakened by between 2 million to 4 million bpd due to the virus.

The cost of supply curves can be a good barometer to gauge how the market will react to various scenarios, said Erlingsen. Rystad Energy 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 US$5/bbl. In fact, around 92 million bpd of production has an SRM below US$5/bbl. Total production with an SRM cost above US$15/bbl is around 4 million bpd.

Rystad Energy estimates that the total demand for liquids will be around 100 million bpd in June 2020, assuming no coronavirus impact.

The cost of supply curve moves to the right if OPEC+ increases production. The equilibrium price moves from around US$25/bbl (no additional OPEC+ supply) to US$19/bbl in the modest 1.5 million bpd increase scenario and US$14/bbl in the large 2 million bpd increase scenario.

If demand weakens by 2 million bpd in June (total demand of 98 million bpd), the equilibrium oil price moves from around US$19/bbl to around US$11/bbl in the modest OPEC+ increase scenario. If demand weakens by 4 million bpd in June (total demand of 96 million bpd), the equilibrium oil price moves down to around US$9/bbl in the modest OPEC+ increase scenario.

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