Story by Myra P. Saefong
https://www.msn.com/en-us/money/markets/what-an-opec-flood-the-market-scenario-may-do-to-oil-prices/
COMMODITIES CORNER
A scenario in which a group of major oil producers known as OPEC+ decides to “flood the market” is seen as a long shot, but still something to consider given that history has been known to repeat itself.
The Organization of the Petroleum Exporting Countries and its allies are expected to announce their decision on oil output quotas at a virtual gathering on Thursday — four days after postponing their ministerial meeting that had been previously scheduled for Sunday.
Saudi Arabia, which has implemented a voluntary reduction of 1 million barrels per day output from July to the end of this year, requested that other members of the group reduce their quotas, but some are resisting, Bloomberg reported on Monday. A reduction would help tighten the market following a drop in prices from late September, when they reached their highest levels of the year.
As of Friday’s settlement, U.S. benchmark West Texas Intermediate crude futures traded more than 19% below its 52-week high of $93.68 on Sept. 27, while global benchmark Brent crude has lost nearly 17% from its Sept. 27 52-week high of $96.55, according to Dow Jones Market Data.
Traders can’t help but remember when a production-quota disagreement between OPEC+ members Saudi Arabia and Russia led to a price war in March 2020. The situation led WTI futures prices to drop more than 300% to a negative-$37.63-a-barrel settlement on April 2020, the lowest settlement price for a contract ever recorded.
That’s not likely to happen this time around.
If OPEC+ decides to battle non-OPEC suppliers by “increasing production to hit more expensive competitors,” that would be the “most extreme scenario,” analysts at BNP Paribas wrote in a note dated Friday.
Under that scenario, global supplies would climb by about 3 million barrels, the analysts said. They pegged OPEC spare production capacity at about 4.5 million barrels, but assume that the group will want to retain some of that.
Oil prices would have to drop to levels that shut in existing non-OPEC production, which the BNP Paribas analysts see as $40 a barrel for Brent.
Eventually, however, oil prices would stabilize at their “low scenario” levels.
Under the BNP Paribas analysts’ low-case scenario, harder-than-expected economic landings in Europe and the U.S., and continuously disappointing Chinese growth, sap oil demand, while non-OPEC supplies ramp up fast and OPEC unity is “too frail for additional cuts.”
In that case, Brent could drop to around $65 to $70 a barrel temporarily.
The demand response to prices below $70, however, would be significant because lower prices raise demand and reduce the incentive to produce more oil, the BNP Paribas analysts said.
They also pointed out that the Biden administration has previously said it planned to buy oil at around $70 a barrel for WTI to refill the U.S. Strategic Petroleum Reserve after selling 180 million barrels of oil from the reserve in 2022 to keep oil prices in check. “There is a significant gap to fill in a low-price environment,” the analysts said.
SPR demand should balance global markets in most scenarios, though the timing of the refill is “tricky,” they said. With U.S. elections in November, they assume the SPR refill incentive is relevant only in the first half of 2024 and 2025 onwards.
For non-OPEC producers to shut in oil supplies, that would require prices below BNP Paribas’ low price case scenario of $65 to $70 for Brent.
Existing production from Guyana, Brazil and Canada would shut in at prices below $35, the analysts said, citing data from Wood Mackenzie. They also said a Dallas Federal Reserve survey showed that existing U.S. shale wells shut in output between $30 and $45 a barrel, while new shale wells are more expensive at $56 to $66.
All of that would imply a short-term WTI of $35 to shut in existing production, and $65 in 2025, as new supplies would be required by then, the analysts said. For Brent, assuming a WTI discount of $4 to $5 to the global benchmark, that implies supply shut-ins at $40 and reduced new supplies at $70 for Brent, which is their current low-case price scenario.
Still, with SPR refills and demand increasing in other sectors, the BNP Paribas analysts said they do not expect oil prices to stay below their low-case price scenario for longer than “about two quarters.”