Oil Price Next Year Relies on 3 Factors

(October 4, 2019) — Three essential factors will determine the direction of the oil price and market balancing next year, according to Oslo, Norway-based Rystad Energy. In a market update, BjØrnar Tonhaugen, head of oil market research at the business intelligence company, argues that a balanced oil market in 2020 is contingent on three pillars: no global recession, continued OPEC production cuts, and the effect of stricter new International Maritime Organization (IMO) regulations effective Jan. 1, 2020 on vessel bunker-fuel emissions.

“Markets can balance with an extension of the OPEC cuts through 2020, as we believe the IMO 2020 regulations will create more demand for crude oil,” Tonhaugen said. “Moreover, the global economy needs to avoid a sharp downturn and oil demand recover to more normal growth rates of between 1 MMbbld and 1.2 MMbbld.”
He added, “If the stars fail to align, however, OPEC may need to discuss much deeper cuts to support the market.” In its Oil Market Balances Report, published the week of Sept. 2, Rystad Energy finds that the oil market can come into balance next year, even at current prices. Revisions suggest OPEC crude oil production will reach 30.1 MMbbld in 2020 compared to the 29.5 MMbbld forecast in its previous monthly report.

However, a balanced market next year also implies that the global economy does not enter a recession and that crude demand recovers to around 1.2 MMbbld growth. OPEC needs to maintain current production levels and extend cuts through at least 2020. Finally, the introduction of stricter shipping fuel regulations—the so-called IMO 2020 effect—will cause a net positive outcome for crude demand growth next year of about 1 MMbbld in order to balance the global gasoil market.

“Without the expected additional crude runs in 2020, on top of the normal growth in refinery runs to keep up with overall products demand without IMO 2020, prices will be even lower next year unless OPEC cuts its production to around 29 MMbbld in 2020,” Tonhaugen said.

Rystad Energy forecasts that crude oil and lease condensate production growth outside of OPEC and Russia will reach 2 MMbbld in 2020, down 200,000 bbld from its previous estimate. The U.S. oil supply forecast for December 2020 is revised down by 500,000 bbld to 14 MMbbld, which represents a yearly addition of 1.15 MMbbld, according to the independent energy research firm.