Thoughts on the oil market in 2020


It’s the time of year to make predictions.

This week, we attended an event hosted by the New York Energy Forum (NYEF) to discuss the outlook for oil prices.

Where are oil prices headed in 2020? What will be the main stories impacting the market?

A survey conducted by NYEF showed most respondents believe oil prices in 2020 won’t stray far from current levels.

Oil prices will likely average $55-$65 per barrel this year, with Brent holding a $6-$8/b premium over WTI, according to the survey.

ICE Brent averaged $65/b over the last 30 days, versus $60/b for NYMEX WTI. That includes a spike earlier this month when tension escalated in the Middle East between Iran and the US.

Still, oil prices signal a stronger market than they did last year at this time. That’s true both in terms of flat price and structure (See the chart below).

Oil price data: IntercontinentalExchange
Oil price data: IntercontinentalExchange

One reason for the relative strength is global inventories, which tightened in the fourth quarter of 2019, falling below year prior levels, according to Ursa data. The year-on-year deficit has continued into the early part of 2020.

Source: Ursa
Source: Ursa

Here’s a recap highlighting some of the things we heard:

Geopolitical risk

Geopolitical risk could cause oil prices to rise again, similar to the period after the September attacks on Saudi oil infrastructure or the January 3rd killing of Iranian commander Qassem Soleimani.

Apart from Iran, other hot-spots include Libya, Venezuela and West Africa. But will any incident lead to higher oil prices for more than a few days?

Both times oil prices spiked recently were short-lived affairs. A different outcome will require supply to be taken off the market.

The Middle East

“We don’t want to be there.” That’s the main message coming from the White House about the US military presence in the Middle East.

There is even a (remote) chance the US and Iran will come to the table once again to renegotiate a nuclear deal.

Almost certainly, Iran would demand the US lift some restrictions on its oil exports, as a precondition for talks, and if that happens, then more oil supply would be available globally.

Economic assessment

Compared with a year ago, the macroeconomic outlook is more optimistic.

At the start of 2019, everyone was worried about the negative impact the US-China trade war would have on the global economy. That sense of gloom has dissipated amid signs of progress in trade talks between Washington and Beijing.

Global oil demand is off to a better start in 2020 because the global economy is off to a better start than last year.

There’s even a possibility that by the end of this year the global economy could enter a period of synchronized growth. As for the US, a recession doesn’t look imminent, not until 2022 at the earliest.

International trade & oil demand

A significant question will be whether the US-China trade spat signals a real turning point.

Under President Trump, the rules-based institutions that governed the system of international trade for decades have been challenged in profound ways.

One consequence was a slowdown in international trade last year, which dragged on the economy and by extension softened oil demand.

Transportation has been the key driver behind oil demand growth for a while, reflecting ever increasing volumes of goods crisscrossing the planet by air, sea and land.

Without this catalyst, the future of oil demand certainly looks weaker.

Non-OPEC supply

A significant development in 2019 was oil production growth outside OPEC and the United States from the likes of Brazil, Norway and Guyana.

It helps explain why the oil market’s reaction to Middle East tension wasn’t more severe.

As bad as things got, in the back of everyone’s mind there was an awareness the supply situation wasn’t dire.

You also had US shale plus OPEC production being kept offline as part of a voluntary cut agreement that could return if needed.

However, that production growth outside OPEC, ex-US, won’t last forever and could tip into decline after 2020.

We’ll keep you informed on the latest developments in the oil market this year. You can sign up here to have the blog sent to your inbox every week.




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