OUTLOOK '20: Fundamentals supportive of oil prices in 2020

US-CHINA TRADE DEAL
The world’s two biggest economies, the US - currently the world’s largest crude producer - and China - the world’s largest crude importer - have agreed to phase one of a trade arrangement after nearly 18 months of tit-for-tat tariffs and sabre-rattling, which could see demand for crude going up once more.

The Chinese and US governments released statements in mid-December saying they had reached a provisional agreement.

The deal is expected to have a bullish effect on crude prices because it could jumpstart the Chinese economy, which has shown a series of slowing economic indicators since the beginning of the trade dispute.

Both leaders of the US and China advised caution of any potential deal being finalised. If ratified, the new trade deal could see a boom for Chinese goods being exported to the US, which would raise demand for crude.

Should the fragile trade relations suddenly disintegrate, however, it could trigger large sell offs and cause some economic growth stagnation throughout the year.

The pro-democracy protests in Hong Kong have received US government support, which has angered China, and have also caused some damage to the local economy – these could be one of the reasons a deal may falter.

IMO 2020
January will see the implementation of the International Maritime Organization’s IMO 2020 regulations on ship fuel. The rules prevent ships from using fuels that have 0.5% or more sulphur content, or having to install expensive fuel scrubbing systems on board when they use higher sulphur fuels.

The application of IMO 2020 has had a bullish effect on the sweet crude market over 2019 because increasing demand for IMO compliant fuel. It is expected that several sweeter grades will see continued higher prices over the course of 2020 as the market realigns itself upon the rules coming into effect.

Earlier this year, the US Energy Information Administration had forecast an increase in US refinery runs during the closing months of 2019 caused in part by the IMO implementation.

The EIA predicted that US refinery runs would rise by 3% from 2019 to a record level of 17.5m bbl/day in 2020, resulting in refinery utilisation rates that average 93% in 2020.

Goldman Sachs’ modelling showed that compliance with IMO 2020 would be upwards of 85% and forecast Brent prices at $60/bbl in 2020 with more upside to gasoline cracks than previous.

OPEC CUT
There was bullish expectation in the market after OPEC and its allies decided in early December to deepen the cuts imposed on member countries by 500,000 bbl/day to 1.7m barrels. The curb in production was originally going to be extended to June 2020, however, this was not put in place.

The announcement of the cuts was met with a small rise in the price of crude, but there is not a high expectation in the market for the cut to create bullish conditions long term.

The US is currently producing its highest ever, output was at 10.99m bbl/day in 2018 and rose in 2019, according to the EIA, partially thanks to shale gas output, which could dampen the effect of the cut. Norway and Brazil are also producing near record levels.

The organisation has scheduled its next meeting for March where further cuts and a possible extension could be put into place.

Libya, Iran and Venezuela were all given waivers on the curb as their economies were deemed unable to absorb any possible drop in income that the cuts might cause.

GEOPOLITICAL TENSIONS
The world will continue to experience disruption to crude output and prices due to geopolitical tensions in 2020.

Libya’s plans to drastically increase production over the next few years is expected to continue suffering strain from the civil war within the country, which has regularly effected production from fields.

OVERALL 2020 OUTLOOK
The outlook for January looks supportive for crude. The agreement of a US-China trade deal should see oil demand up as economic prospects improve after 18 months of uncertainty.

This is coupled with the continued high demand for sweet light grades that comply with IMO 2020 rules on sulphur, which have driven some grades to record prices.