Oil may struggle to repeat 2019’s performance in 2020
Oil may struggle to rally significantly next year as supply keeps growing, analysts say
It was a stellar 2019 for oil, when the price of a barrel of oil gained almost a quarter in value. Next year, however, could bring only very meagre gains to a market that may continue to suffer from oversupply.
Crude oil prices have gained around 25 per cent this year. This makes it their strongest annual gain in percentage terms since 2016, when the world’s largest producers first agreed to jointly cut output and ward off a steeper decline.
A Reuters monthly price poll shows that analysts believe Brent crude will forecast a little over $63 a barrel in 2020, which marks a small improvement on the previous month’s forecast of $62.50.
This compares with this year’s average of around $64 a barrel. Even with the turbulence injected by uncertainty over the impact on global demand from the US/China trade dispute, the oil market has experienced less price volatility this year than in 2018. The price has seen a swing of about $21 between the highs and the lows of the year in 2019, compared with a swing of over $30 in 2018.
Key for the price outlook is the production deal between the Organization of the Petroleum Exporting Countries, headed by Saudi Arabia, and some of its rival exporters, such as Russia, Kazakhstan and Oman, who have agreed to maintain output cuts in place since January 2017.
Morgan Stanley is among the bearish of oil-market watchers, with an average forecast of just $60 a barrel in 2020, on the grounds that there is simply “too much of everything”.
“In energy, strategists see a precarious balance in the oil market, with OPEC making additional supply cuts next year to keep oil around $60 a barrel,” the bank said in its 2020 global outlook.
OPEC+, as the group is known, agreed in early December to cut crude output by another 500,000 barrels per day, bringing total cuts to 1.7 million barrels per day, equal to about 10 per cent of daily global production.
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The United States and China are on the verge of signing a preliminary agreement to end their near-two-year trade dispute, which in theory, bodes well for the oil market.
However, the problem does not just lie with demand for oil. Even with production cuts from OPEC and its partners, supply from non-OPEC producers, including top producer the United States, will likely outpace consumption next year.
The International Energy Agency, which advises western governments on energy policy, cut its forecast for non-OPEC supply growth to 2.1 million barrels per day, but this will still leave an overhang of unused fuel, at least in the early part of the year.
“Even so, with our demand outlook unchanged, there could still be a surplus of 0.7 mb/d in the market in 1Q20,” IEA said in its most recent monthly report.
Consultant McKinsey recently projected oil prices will stay in a $60-70 range in 2020, but only if OPEC+ remains disciplined with its production cuts.
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