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Oil price predictions for 2020 and beyond

By Elena Berton

“Black gold” dominates every aspect of modern life, from disposable cutlery to global economy trends. We look at where oil prices are heading in 2020 and beyond

Intro

One of the most actively traded commodities in the world, oil dominates modern life.

It fuels our cars and planes, it’s the source of most everyday objects, it’s often the cause of wars and can make everyone involved very rich. Despite dwindling reserves and talk of a “post-petroleum” world, the black gold remains a closely watched vital resource.

Supply, demand and sentiment

Oil prices depend on the interaction between supply and demand in international markets as well as market sentiment. Global trade wars and events such as attacks on energy infrastructures that disrupt production have immediate repercussions on the oil price outlook.

The price of oil is actually set in the oil futures market through futures contracts – a binding agreement that gives the buyer the right to purchase oil by the barrel at a predefined price on a predefined date in the future.

Controlling prices through output

Until the middle of the 20th century, the United States was the world’s largest producer of oil and controlled oil prices.

Since the 1960s, the Middle-East dominated Organisation of the Petroleum Exporting Countries (OPEC) has controlled production and prices. However, with the discovery of shale in the US and advances in drilling techniques, which have cut the costs of extraction, the US has re-emerged as a top producer of oil.

In August 2019, US crude production soared nearly 600,000 barrels per day to a record of 12.4 million.

Although OPEC and its OPEC+ allies still have the ability to drive prices, the US has limited the cartel's pricing power by ramping up production whenever OPEC cuts its output.

OPEC is currently considering whether to deepen or extend production cuts amid concerns of weak demand growth next year.

Oil price outlook

As they meet in Vienna on December 5 to discuss how they will manage production, oil producers from the OPEC cartel and their allies face a delicate balancing act.

The existing agreement, which runs up to the end of March 2020, calls for supply cuts of 1.2 million barrels a day. While some countries have shrunk production more than required under the deal, others, like Russia and Iraq, have not met their share of cuts.

Saudi Arabia is keen on keeping a tight lid on the market because it needs high prices, since the meeting in Vienna will coincide with the pricing of the long-awaited flotation of state oil company Saudi Aramco. But at the same time the country will have to contend with Russia’s position that there is no reason to extend the cuts beyond March 2020.

Outside challengers

OPEC’s efforts to rein in production and lift prices are facing challenges from outside rivals such as the US shale oil industry and the burgeoning shale oil production in Norway, Brazil and Guyana, according to a recent report by the International Energy Agency.

Standard Chartered analyst Paul Horsnell reckons the performance of US crude oil supply will be the main variable for oil markets in 2020. “There is a wide range between forecasts, with one cluster pointing towards a sharp slowdown in growth and another looking for an acceleration,” he wrote.

Oil price trends in 2019

During 2019, supply and demand for oil have pulled prices in opposite directions. Supply continued to contract due to the cutbacks made by OPEC and Russia, sanctions against Venezuela and Iran as well as spending pullbacks by US shale producers.

On the other hand, demand has slumped, hit by weakening global trade.

In 2019, the average closing price per barrel of Brent crude, the global benchmark, has hovered around the $64 level, down 10.3 per cent from $71.34 in 2018.

OPEC’s average oil price per barrel, which the cartel compiles from prices for its members’ output, has been around the $62.92 level, down 9.7 per cent from $69.78 in the previous year.

The continuing trade war between the US and China and the lingering global economic weakness has forced analysts and producers to tweak their assumptions for demand growth in 2020. In its own oil price predictions, OPEC has said that there are “signs of stress” that could hit demand.

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Oil price forecast, 2020 and beyond

The direction of oil prices in 2020 will be dependent on three key factors, according to Bjørnar Tonhaugen, head of oil market research at Rystad Energy. These include the avoidance of a global recession, continued OPEC production cuts and the effect of new, stricter shipping fuel regulations – the so-called IMO 2020 – which are expected to cause a positive effect on crude demand growth next year.

Current forecasts are pointing at oil price trends around the $60 mark for 2020, with an uplift expected in the following years.

According to the oil price prediction consensus compiled by Bloomberg, Brent crude is expected to average $64 per barrel this year, $60.1 per barrel in 2020, $61.9 per barrel in 2021 and $62.5 per barrel in both 2022 and 2023.

Chris Midgley, the head of analytics at S&P Global Platts, said Saudi Arabia’s strict stance on production may be enough to hold prices at $65 a barrel, but it is unlikely that OPEC+ will be willing to push prices up.

“Eventually, Russian producers will push to increase their quota, which is likely to hold back [oil prices] in the lower $60s during 2020,” he said.

This sentiment is echoed in a recent research note by Goldman Sachs analysts : “Absent growth or geopolitical tensions escalating into meaningful shocks, we expect that Brent oil prices are likely to continue trading in 2020 around our $60 (a barrel) forecast.”

Fitch Solutions Macro Research’s latest long-term oil price forecasts are predicting a gentle slowdown in the next three years, followed by a pick-up towards the middle of the decade. Analysts expect Brent to average $64 per barrel in 2019, $62 per barrel in 2020, $58 per barrel in 2021, $59 per barrel in 2022 and $61 per barrel in 2023.

However, long-term oil price trends appear more positive.

The World Bank anticipates that all three major benchmark oil prices – Brent, WTI and Dubai – will continue to increase after 2020 to reach $70 per barrel on average by 2030.

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FURTHER READING:

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