Oil prices likely to average $40 per barrel in 2020, says IIF

The Washington-based institute expects a recovery in global consumption during the third and fourth quarters

An Austrian Armed Forces soldier wearing a face mask patrols in front of the Opec headquarters in Vienna. The group reached a historic pact with the G20 to cut production. EPA

Oil prices are likely to average $40 per barrel in 2020, if the Opec+ agreement to cut production achieves full compliance, according to the Institute of International Finance.

The Washington-based institute expects Brent, the most widely traded crude benchmark, to pick up from $32 per barrel in the second quarter to $41 per barrel in the fourth quarter. The IIF based its assessment on full compliance with the agreement to cut 9.7 million barrels per day of output from the markets by Opec+ members in May and June. The drawback is equivalent to a tenth of global supply.

Brent was down 0.47 per cent at $31.59 per barrel at 1.51pm UAE time, while West Texas Intermediate, which largely tracks North American crude grades was 1.65 per cent lower at $22.04 per barrel.

The pact was also backed by the G20 nations, the US - the world's largest producer - as well as other oil producers such as Canada and Brazil who are expected to contribute non-voluntary cuts. Opec+ will taper restrictions after June to 8m bpd from July until the year-end. An adjustment of 6m bpd is expected to hold from the beginning of 2021 until April 30, 2022.

The producers have accepted a cut of 23 per cent of their production levels from October 2018, with the exception of Saudi Arabia and Russia, which are expected to cut from a baseline of 11m bpd. Mexico, which had stalled the marathon negotiations last week, will only cut 100,000 bpd, which is less than its stipulated quota. The US is expected to make up for the remainder of its production cuts. It remains unclear how the US, which has never been party to an output cut deal and whose industry is comprised of thousands of independent producers, is expected to contribute.

"We foresee up to 3.5m bpd of additional reductions coming from outside the Opec+ alliance," said Garbis Iradian, chief Mena economist at the IIF.

"While the Trump administration is not allowed to mandate cuts due to antitrust laws, US crude oil production is likely to fall because current prices are below the level that shale producers need to break even," he added.

US President Donald Trump, who brokered peace between members of the Opec+ alliance following the collapse of talks in March, was emphatic that the alliance cut production to 20m bpd.

While cuts from outside the alliance are expected at 5m bpd, according to Russian energy minister Alexander Novak, much of it is expected to come from declines as well as companies folding due to low prices.

The IIF expects US crude output to average 12.3m bpd, a decline of 900,000 bpd from levels seen last year. Canada's largest-crude producing province, Alberta, is also likely to see a fall in production by 700,000 bpd.

Offshore production in Brazil and Norway as well as in parts of Asia is also expected to decline.

Global consumption is expected to have collapsed 20 per cent over the last couple of months following strict lockdown measures in various countries. However, the IIF expects a recovery in demand in the third and fourth quarters.

"For 2020, we now expect an average drop of around 8m bd, equivalent to over 8 per cent of global consumption," Mr Iradian said.