The oil market’s biggest nightmare briefly came true in 2019 — an attack that knocked out more than half of all production in Saudi Arabia, the world’s biggest crude exporter.
But in little more than a week, oil prices were back to where they started. That was partly because of a quicker than expected recovery of the kingdom’s facilities, but also because traders said that fears of oil shortages were hard to sustain in the era of US shale.
They might have a point. Crude prices started 2019 near $60 a barrel and look set to finish the year at roughly that level. The market has taken almost everything thrown at it in its stride.
But will 2020 prove to be another uncommonly placid year in crude, with volatility calmed by the US oil juggernaut? The history of the oil market suggests that outcome is unlikely, with periods of complacency quickly giving way to heightened volatility. Already traders and analysts are arguing over whether US shale can really keep growing and, if not, how the oil market might react.
Here are five things to watch in the oil market in 2020.
The outlook for US shale will most likely be the biggest single oil-specific factor to decide crude’s path next year.
The sector has shown tremendous growth in recent years, heaping pressure on Opec as supplies have expanded faster than demand.
But there are signs that shale growth may slow or eventually reverse in 2020. The small independent companies that still dominate the sector are finding it increasingly difficult to raise money and struggle to generate positive free cash flow consistently.
Some analysts see US shale expanding in the first half of next year, but then flatlining or declining, potentially leaving production largely unchanged from January to December.
Rystad Energy, a research company, calculates that shale investments declined 6 per cent this year to $129bn and predicts they will fall another 11 per cent in 2020 — though it still expects production to rise slightly.
“US shale activity is slowing as drillers retain a focus on capital discipline,” said Chris Midgley at S&P Global Platts.
Slowing demand growth
The wild card for oil could be the strength of the global economy. Oil demand has struggled in 2019 as the US-China trade war threatened to derail a decade-old economic expansion.
It is still expanding, however, averaging close to 100m barrels a day for the first time, but analysts predict an annual rate of growth of below 1 per cent for the first time since prices crashed in 2014.
Demand has not been helped by an economic slowdown in India, which is second only to China in driving consumption growth.
“The oil demand picture for next year and, to a big extent, the price outlook, will hinge on a recovery in global economic growth,” said Stephen Brennock, an analyst at PVM Oil Associates.
Opec and allies such as Russia (Opec+) have been fighting a rearguard action against US shale since 2016, and at the start of December they made another cut to production in a bid to stop the market becoming overwhelmed by new supplies in the first half of next year.
They have been relatively successful at propping up prices near $60 a barrel, but few expect them to be able to push crude significantly higher.
Opec’s own analysts are, however, forecasting that next year the market will be relatively balanced, at least if they keep the cuts in place — and implying the balance of supply and demand will be tighter in the second half of the year than in the first, especially if US shale production slows.
Opec sees demand for the cartel’s crude at about 29.6m b/d next year — roughly matching what the latest cuts suggest it will pump, with much of Iran and Venezuela’s oil off the market because of US sanctions.
"By focusing on short-term physical imbalances, Opec+ is targeting tight physical markets,” analysts at Goldman Sachs said.
US presidential election
For the oil market, the US presidential election in 2020 is really about one man: Donald Trump.
The tweeter-in-chief has made lower oil prices a key part of his economic pitch to voters, and in the past he has not been shy about firing 140-character broadsides at Opec if he thinks the group — and in particular close ally Saudi Arabia — is letting prices get too high.
Some analysts even believe this fed into Saudi Arabia’s decision to push for a production cut this month, because it may find reducing output more optically challenging in a US election year.
Given Riyadh is widely believed to hope Mr Trump remains in power, not least because of the pressure he has heaped on Iran, it would be foolish to rule out the presidential campaign somehow impinging on oil’s fortunes.
This was the year when investors, at least in the developed world, started to get serious about climate change.
For the largest European oil producers, this is pushing them to try to find cleaner business lines and to think hard about the future. The fear is that banks may start treating them like coal miners, potentially restricting access to capital.
With their share prices suffering, despite paying bumper dividends, expectations are growing that so-called Big Oil may need to accelerate into the energy transition. Will 2020 be the year?
Expectations that environmental trends will gather further momentum are hanging over the entire industry, with some analysts predicting the 2020s could be the decade when oil consumption finally peaks.
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