The push and pull effect on oil prices

Tuesday, 2019-12-24 17:23:39
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Pump jacks operate at sunset in Midland, Texas, U.S. February 11, 2019. (Photo: Reuters)
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NDO - On the threshold of the New Year 2020, analysts have made multidimensional assessments of current world demands and oil prices. In the context that the US-China trade tensions have not ended, the world economic growth outlook is not positive, shale oil and gas production has levelled off and it is unlikely that oil prices will witness a big fluctuation in 2020.

World oil prices have edged up in the final weeks of 2019, after positive news about US-China trade negotiations. In recent period, “black gold” has priced more than US$60 per barrel. Energy experts said that the price of crude oil in early 2019 was nearly US$60 per barrel and the price may remain the same until the end of the year.

According to economic experts, 2020 will be a volatile year for the oil market. However, the amplitude of price increase and decrease may not be too big since the price of “black gold” is in a struggle of favourable and unfavourable factors.

First of all, the supply of oil is in a downward trend due to the Organisation of the Petroleum Exporting Countries and its partners (OPEC+) continuing to reduce production to push up oil prices next year. In early December, OPEC+, including Russia, agreed to cut oil production by 500,000 barrels a day from January 1, 2020.

With this decision, the new oil output will be less than 1.7 million barrels a day compared to the output of October,2018. OPEC also said that many other countries, including Saudi Arabia, will continue to further cut oil production. This signifies the total oil production cut can reach 2.1 million barrels a day. Thus, OPEC's output cut agreement will reduce the supply, contributing to the rise in oil prices.

Another factor that will give a thrust for oil prices is that the supply of shale oil and gas is likely to slow down and decline from the peaks of 2018 and 2019. According to the US Energy Information Administration (EIA), output from seven key US shale oil regions has exceeded eight million barrels a day since the end of 2018. This year, the US crude oil production has increased by two million barrels a day to a record high of 12 million barrels a day. Accordingly, the US surpassed Russia and Saudi Arabia to become the largest oil producer in the world.

However, there are also signs that the growth of shale oil will slow down, even decline in 2020. Investment in shale oil in 2019 has decreased by 6%, to US$129 billion and is expected to decrease by another 11% in 2020. In recent years, the increase of the US shale oil production is an important factor causing oil prices to go down, thus the level off of the shale oil production can affect the oil supply, pushing up oil prices. Besides, many analysts said that the cooling down of the US-China trade war will make the world economic outlook more optimistic and increase the demand for “black gold”.

However, besides the favourable factors that help oil prices increase as mentioned above, there are still many barriers and potential risks to the world oil market over the next year. Although shale oil production in the US has levelled off, the decline may not be large enough to cause a significant drop in supply and drive up oil prices. In addition, the 2020 US Presidential election could also impact the world oil market in the direction of curbing rising oil prices. Over the past term, President Donald Trump has pledged to keep oil prices low as an important part of his economic policy for voters. Therefore, if President Trump is re-elected, US energy policy will be in the direction of low oil prices.

Regarding the oil supply, although OPEC+ has cut production, the International Energy Agency (IEA) still warns of oversupply in the global oil market. In fact, after OPEC+ announced to cut oil production, Brent oil price only increased by US$1 to about US$64 per barrel. The IEA also lowered its oil demand forecast next year to 101.5 million barrels a day, down 0.1 million barrels a day.

In addition, in the context of the “global economic machine” operating weakly, many analysts are not so optimistic regarding positive prospects of the world economy next year. The International Monetary Fund (IMF) in its recent report on the world economy in 2019 lowered its forecast for global economic growth this year to 3%, the slowest pace since the 2008-2009 financial crisis. Currently, the world economic outlook next year is still very unpredictable when the US-China trade war is still in danger of reoccurring. Analysts said oil demand and oil price prospects next year will revolve around the recovery of global economic growth.