Analysts divided over what happens next for oil; which way will the winds blow in 2020?
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Just where is oil going? In 2019, oil prices made only slight gains despite supply scares such as the September drone attacks on Saudi Arabian oil refineries.
However, analysts and major stakeholders do not appear to have reached a consensus on the direction that oil could take this year, with arguments raised for prices to rise, fall or stay within the same range it has been trading in.
Institutional asset manager Principal Global Investors is one of the bulls forecasting that energy stocks could be the safe bet in 2020.
Chief strategist Seema Shah said that while “geopolitics are difficult to predict at the best of times” and that both the US and Iran would like to avoid further conflict, history indicates that lasting peace between the two countries is unlikely.
“If tensions were to re-intensify, causing a meaningful disruption to oil supplies, the global economic impact would depend on how far, and for how long, oil prices rise,” she noted.
Shah added that while the economic outlook for 2020 was more promising than in 2019, there remains potential geopolitical risks, including a “shock” outcome in the US presidential elections later this year; renewed US-China tensions; and a repricing of “no-deal” Brexit.
The recent signing of a first phase trade deal between the US and China could boost oil prices by reducing tensions between the two countries and promoting economic growth.
The Organization of the Petroleum Exporting Countries (OPEC) has increased its 2020 global oil demand forecast by 140,000 barrels to 1.22 million barrels per day, citing an improved economic outlook for 2020 as the reason for this growth.
However, critics have noted that while the deal would see the US roll back some of the tariffs while China would boost purchases of US products, the bulk of the tariffs and the Chinese practices such as investing billions in state-owned companies remain in place.
Global resources consultancy Wood Mackenzie added that while China had agreed to increase energy imports from the US by up to $US52.4 billion, the fact that China had not removed either the 5 per cent tariff on US crude oil or the 25 per cent tariff on US liquefied natural gas made it challenging for the Asian giant to increase its imports from the US.
At the other end of the spectrum, research institute JBC Energy chairman Johannes Benigni told CNBC that should the current Iranian government change due to fallout from the admission that the army had shot down the Ukrainian passenger liner by accident, oil prices could shift in the other direction.
He said that a pro-American regime could result in sanctions being lifted, which would lead to a flood of Iranian oil onto the market, sending prices down as low as $US40 a barrel.
However, this is considered to be an unlikely scenario given that the US is now an oil exporter itself and is unlikely to be too sympathetic to the rise of another competitor, particularly one that can take oil prices down below what is economic for its shale oil producers.
Benigni believes that if no such regime change happens and OPEC continues its production cuts, oil prices will remain bound between $US60 and $US65 per barrel through 2020.
Stockhead’s resident resources expert Peter Strachan believes that the oil market is fundamentally oversupplied and only kept in balance by sanctions on Iran along with OPEC and Russian production controls.
“This year the situation will be stable I think. US light tight oil producers will see production flatten out and begin to fall later in the year as rigs come out of basins that cannot fund themselves from operating cash flow,” he said.
“The debt and equity markets have finally come to their senses and see that this business is fundamentally cash flow negative. A slowdown in drilling will enable companies to harvest cash flows which should also keep Brent above $US60 but below $US70 per barrel.
“Any prolonged move over $US70 per barrel would see rigs rolling into Midland, which would dampen the market for oil.”
Strachan added that while new supplies of oil would be coming or had come on-stream from the North Sea, offshore Guyana, the Gulf of Mexico and Alaska, daily demand had also increased by 1 million barrels each year.
“Last year was a one-off for exploration success, with addition of over 12 billion barrels of new oil reserves, but globally, we are now consuming 36 billion barrels per annum, so the annual deficit has been ongoing for about 15-20 years,” he noted.
“I think that the oil price will have to stay at around $US70 to $US85 per barrel through the 2020s to attract new output, but any move above $US85 per barrel would be likely to destroy demand, cause an economic slowdown and depress prices, just as we have seen in the past.”