Let’s Not Forget the Fundamentals
February 17, 2020

Given the current level of uncertainty in the oil markets, it is not straightforward to place bets with any degree of conviction on the price of oil in the short to medium term. 

Positive drivers on the price of crude oil through 2020 include continued heightening of tensions in the Middle East, the potential weakening of the U.S. Dollar, and extending OPEC supply cuts. Negative drivers include the increase and pace of growth of non-OPEC production, increasing U.S. shale oil production, slowing global oil demand, the slowdown in the growth of the Chinese economy, the Coronavirus outbreak, the willingness, or the ability, of some OPEC members to continue to hold current production levels. Those are just some of the negative drivers.

Attending an E&P Leadership Team meeting in early January, the number of arguments for the bulls outweighed those for the bears by some margin. And yet here we are four weeks later (at the time of writing), many of the same people are already reconsidering their current positions for the year ahead. Some of the budget assumptions suddenly seem questionable. I am still whether wondering some of the attendees genuinely believed that oil prices might end the year closer to $70 than $50. 

Caution should be the primary sentiment when trying to understand better where oil prices could go in 2020. The key here is not to lose sight of the fundamentals. Given all the factors in play, we find it hard to disagree with the bearish views on oil prices for the year ahead expressed by the International Energy Agency (IEA) for 2020. 

If oil prices are to hold firm or gain in the year ahead, they are likely to need shoring up on several fronts.

We don’t believe there are sufficient tailwinds to drive oil prices significantly higher. If anything, there are potentially many more severe headwinds on the short and long-term horizons to negatively affect oil prices.

We mentioned the potential impact of increasing production from non-OPEC countries, like Brazil, Canada, and especially Norway, with their latest giant field. Also, you have the U.S., which has slowly been increasing the amount of shale oil produced since 2015. Thanks to shale production, September 2019 saw the U.S. export more oil than it imported for the first time since 1948.

Estimates indicate that Non-OPEC production alone will add 2.3 million barrels a day to supply in 2020. Considerably more significant than the anticipated increase in demand for this year, placing further downward pressure on global oil prices.

Shrinking markets for oil is not something new; certain countries have implemented comprehensive national policies to decrease dependence on fossil fuels in answer to populist demands to implement more aggressive environmental protectionist public policies.

In 2018, demand only grew by 0.5%, and by 1.46% in 2019. Some experts predict that oil demand will peak as early as 2025.

Not only have oil prices continued to fall even with the higher compliance among OPEC members on delivering agreed production quotas. We have also seen U.S. crude stockpiles falling, though refined products have risen slightly. The bottom line is that not only are the oil markets well supplied, but we also see a supply surplus scenario continuing.

The picture to the downside looks bleak. Global economic growth for 2020 has been revised down by the IMF to 3.3%, as have growth projections for both China and India, Asia’s largest and 3rd largest economies. The 2020 downward revisions, coupled with China’s 2019 growth rate of 6.1%, its lowest growth rate in nearly 30 years, does not bode well for oil prices in 2020.

Organizations may not have any control over the global macro economy or singularly control oil prices, what they can control, is how they optimize their spend through the flawless execution of their operations. We have worked with many organizations, both large and small, and no matter how efficient or effective they believe they are, there are always opportunities to drive additional value from their operations, especially with the availability of new technology platforms.