In the oil market, 2019 will be remembered as the year in which one of the worst-case scenarios happened…and the market almost immediately forgot about it.
The Sept. 14 drone strikes on Saudi Aramco oil facilities in Abqaiq and Khurais knocked out more than half of Saudi Arabia’s oil production causing oil to spike by as much as 20%—its biggest single-day gain since 2008.
And then…nothing. Saudi oil production was fully back online just two weeks later, by which time oil was back down below its pre-attack level. It also did little to derail Saudi Aramco’s record IPO in December. Just like that, it was as if the attack hadn’t happened.
Such is the conundrum of today’s oil market. In a time of record U.S. production and deepening supply cuts, terrorist attacks on the system hardly matter. Against that backdrop, these are the biggest questions we have for the oil market in 2020.
1) What will become of U.S. production and inventories?
Record U.S. crude production weighed heavily on oil in the back half of the decade. There was a sliver of good news last week, as the EIA reported U.S. crude inventories fell by 5.5 million barrels the week of Dec. 20, far more than the 1.7 million-barrel drop analysts were expecting, but the U.S. is in a precarious position.
Production growth appears to be slowing, but not enough to offset rising global inventories. The EIA expects U.S. crude oil production to average 13.2 million barrels/day in 2020, an increase of 0.9 million from 2019. As a result, they forecast that Brent crude oil will average $61/barrel in 2020, down from a 2019 average of $64/barrel, and estimate West Texas Intermediate (WTI) will average $55.5/barrel on the backs of “rising global oil inventories, particularly in the first half of next year.”
2) Will OPEC+ continue its cuts beyond March?
The December decision of OPEC+ (the OPEC countries plus countries like Russia) to deepen production cuts by an extra 500,000 barrels per day through the first quarter of 2020 was greeted with open arms by the market.
But beyond March, things are far from certain. Though more cuts are likely, the cartel will likely want to see how compliant its member countries are through March and how demand stabilizes in what is typically a slow period.
Expect an added focus on OPEC when they meet from March 5-6 in Vienna.
3) In what ways will oil companies position themselves to appeal to investors?
With energy closing out the decade as the worst-performing sector in the S&P 500, individual companies are under pressure from Wall Street to solidify their balance sheets and show a viable path forward.
For smaller companies, that could mean M&A. While mergers and acquisitions slowed overall in the sector in 2019 as investors demanded capital discipline from the largest players, there was uptick towards the end of the year. Some analysts are also convinced that there are companies that will be forced into consolidation.
It could also mean an increased focus on clean energy. Some companies took big steps in investing in alternative energy in 2019—both to appease socially responsible investors and diversify their energy sources—though it remains to be seen just how these companies will be rewarded for their efforts.
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