Oil Prices Set To Rebound

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Oil Prices Set To Rebound In 2020

Crude prices finished off the year with a small rally, and analysts are suggesting oil could climb even higher in the coming months.

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Wall Street: Oil prices will rebound.Most major investment banks are forecasting a rebound in oil prices in 2020. Price forecasts vary widely, but most have both WTI and Brent above current spot prices. Bank of America Merrill Lync, for instance, sees WTI averaging $59 per barrel in 2020. Citi is at the bearish end with a $49 price target. For Brent, Barclays says the benchmark will average $72, and a half dozen other investment banks have price estimates within a few dollars of that price.

Financial volatility continues. After suffering steep losses at the start of the week, financial markets rallied strongly on Wednesday and into Thursday, regaining all the lost ground from Monday. Weak industrial data from China released this week still shows signs of a slowdown.

Saudi shakeup leaves MbS still in control. King Salman reshuffled the Saudi cabinet on Thursday, swapping out top security personnel. But the maneuvers did not remove power from crown prince Mohammed bin Salman. The officials that were elevated are close to MbS.

Formal OPEC+ structure looks doubtful. After suggesting multiple times earlier this year that OPEC and its non-OPEC partners – led by Russia – would formalize a permanent governance architecture to coordinate their efforts, the group is now downplaying such a development. Russia’s energy minister Alexander Novak said that the increase in red tape, plus antitrust risks from the U.S. government, make the idea too risky. “There is a consensus that there will be no such organisation. That’s because it requires additional bureaucratic brouhaha in relation to financing, cartel, with the U.S. side,” Novak told reporters. Instead, Novak said they will continue to cooperate without institutionalizing the arrangement. “This won’t be an organisation, this is some mechanism of cooperation: to convene, to discuss, adopt some memorandums, joint resolutions,” Novak.

Bank of England: Banks need to reduce climate risk. The head of the Bank of England, Mark Carney, says that banks need to do more to cleanse their balance sheets of climate risk. When asked by the FT if he is overstepping his institution’s remit, he dismissed that notion. “Absolutely not,” he said. “The issues around climate are wide ranging, and will touch virtually every sector.” He said banks are already modeling the financial risk from climate change and adjusting portfolios, though they need to do more. “They’re looking at specific climate-related risks in their portfolio, [such as] their exposure to certain bits of the auto sector,” he said. “Like it or not, this stuff is coming mainstream.”

LNG shipments to Asia hit record. The volume of LNG shipments heading to Northeast Asia hit a record high in December, driven by demand from China and cold weather. LNG imports into the region – including China, South Korea, Japan and Taiwan – hit 20.5 million tonnes so far in December, or 5 percent higher than the previous monthly record.

Middle East oil producers hit by U.S. shale. As Bloomberg reports, U.S. shale is hitting major oil exporters from the Middle East on multiple fronts. For one, soaring production is lowering prices. But also, U.S. shipments of light crude to Asia are undercutting Saudi exports to the region. Moreover, U.S. exports of refined gasoline and naptha is creating a glut of those products in Asia, forcing prices lower.

Natural gas prices in Permian fell to zero, but rebounded. The glut of natural gas supply in the Permian basin – a byproduct of oil drilling – and the shortage of pipelines to take that gas to market, has led to a crash in prices. In November, natural gas prices traded near zero for much of the month, and even dipped into negative territory. Prices have since rebounded to $1.68/MMBtu in December. The inauguration of new oil pipelines next year could exacerbate the gas problem, as more takeaway capacity could lead to more drilling, which will lead to more gas production. “You’ll see things get worse and worse and worse as oil production grows and gas production grows alongside it,” J.R. Weston, an analyst for Raymond James & Associates Inc., told the Wall Street Journal.

Shell plans on Vaca Muerta development. Royal Dutch Shell (NYSE: RDS.A) said that it plans to begin development of shale oil fields in Argentina after selling off refinery and retail fuel stations. Shell’s Vaca Muerta assets could produce 70,000 bpd by 2025.

Canadian production cuts set to take effect. Alberta’s mandatory 325,000-bpd cuts take effect in January. The decision to force companies to lower output has already provided a jolt to Canadian heavy oil prices. The province believes the full cuts only need to be in place for the first three months of the year. Thereafter, the province will try to unwind the cuts but do so in a way that corresponds with takeaway capacity.

EV sales in Norway reach 60 percent. Between September and November, 60 percent of all new vehicle sales in Norway were electric. EVs are rapidly gaining market share. In 2020, EVs had 3 percent of the market, but by 2020 that share reached 39 percent. For the full year of 2020, the figure looks set to be about 48 percent, even as EV sales accelerated in the final months of the year. Rystad Energy sees EVs capturing 90 percent of the market in Norway by 2022 and 100 percent by 2025.

Goldman: Oil Prices Set For Rebound In 2020

Goldman Sachs believes that the price of oil and other commodities are set for a rebound next year and the first catalyst could come as early as this weekend at a G-20 summit in Argentina, where leaders could discuss the U.S.-China trade standoff and an OPEC idea to begin cutting production again.

“Given the size of dislocations in commodity pricing relative to fundamentals with oil now having joined metals in pricing below cost support, we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” Goldman said in a research report on Monday, as carried by CNBC.

The G-20 summit in Buenos Aires later this week will see the participation of the three key figures capable of swaying decisions regarding oil production policies—U.S. President Donald Trump, Russian President Vladimir Putin, and Saudi Arabia’s Crown Prince Mohammed bin Salman. In addition, President Trump is expected to meet with Chinese President Xi Jinping on the sidelines of the summit to discuss the trade war.

If the world’s top politicians reach some understandings about trade and an OPEC cut, they could offer the oil market some clarity on the current geopolitical uncertainties that have been weighing on oil prices—global economic slowdown and oil oversupply.

Many of those uncertainties have a chance to be addressed at the summit, including “some improvement on the China-U.S. relationship and like in the 2020 G-20 meetings, some greater clarity on a potential OPEC cut,” Goldman Sachs said. Related: Aramco’s $500 Billion Global Expansion

Last week, the investment bank said that volatility would be high over the next few weeks, because prices would need a fundamental catalyst to stabilize.

“While we didn’t think that Brent prices were justified at $86 per barrel, neither do we believe that they are at $59/bbl with our 2020 Brent forecast at $70/bbl,” Goldman said in today’s note, quoted by Reuters.

Meanwhile, in the week to November 20, hedge funds cut their net long position—the difference between bullish and bearish bets—in Brent Crude to the lowest level since January 2020, when oil prices crashed below $30 a barrel, according to Bloomberg estimates on data by ICE Futures Europe.

Expect the oil price to rebound — but with a low ceiling

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The writer chairs the Policy Institute at King’s College London

At just $36 for a barrel of Brent crude $32 for the US benchmark West Texas Intermediate, oil prices at the end of last week were back in real terms to the level of the early 1990s.

The cheering message for investors and companies in the sector is that there are a range of countervailing forces that will ensure some measure of recovery over the next few weeks. The less good news is that a number of other factors will set a ceiling on any significant price rebound.

On the upside, some production, particularly in the US shale business, is uneconomic if prices are below $40 a barrel and can be capped relatively quickly. The International Energy Agency has already predicted a fall of more than 600,000 barrels a day through the rest of this year and that could well increase given the financial difficulties facing a number of operators

When the fall in shale output starts to occur, the prospects for a new quota arrangement between the oil-exporting countries — Opec plus external states such as Russia, Brazil and Mexico — to take more oil off the market will improve. Regardless of the noise and theatre since Opec’s meeting earlier this month, every single one of the countries involved — not least Saudi Arabia, despite its dramatic move in increasing production — has an interest in getting prices up again.

According to one estimate published last week, all the major producers face serious budget deficits at current prices. Many are already indebted. A new Opec quota will have to involve a substantial cut — at least comparable to the fall in Chinese demand.

That brings us to China. Current demand from the country is certainly down, perhaps by as much as by 1.8m b/d, according to the IEA’s estimate, contributing to a global fall in demand of 2.5m b/d from that previously predicted for the first quarter.

Opec’s current estimate of global demand for the whole year is down just over 900,000 b/d on previous forecasts. That sounds a lot but is still less than 1 per cent of total global consumption and, crucially, suggests that despite the economic damage done by the virus, oil demand will end up higher this year than in 2020.

The downturn we are seeing is a temporary rather than a permanent contraction. In the areas of China worst affected by coronavirus, the epidemic appears to have passed its peak and soon the Chinese will go back to work. Oil consumption should return to pre-crisis levels, with imports of 10m b/d or more.

Finally, governments are already producing stimulus packages. The US Congress is debating the content of one and the EU agreed a €25bn stimulus last week. The scale of the Chinese response remains uncertain but the $500bn of spending used to offset the impact of the 2008 financial crash could provide a yardstick.

The question is, how far will the bounceback in the oil market go? With a further cut of perhaps 1.5m b/d by Opec, and some support from outside the cartel — perhaps including Russia and a cap on US shale production — we could get to $45 or $50 by the end of the year, or sooner.

The market is very volatile and the price fall has been due to speculation rather than fundamentals. The drop may have been almost 50 per cent since the start of the year, but on the IEA’s expected numbers for the first quarter, actual demand for oil is down by less than 3 per cent.

The ceiling on price is set by the overhang of potential supply. Given the need for revenue, there is a great temptation for Opec members to breach their quotas and sell more. In addition, any one of the exporting countries now effectively out of the market because of sanctions or conflict (Iran, Venezuela or Libya) could come back if the immediate crisis triggers political change.

Most important of all, the US shale producers living on debt will have every incentive to restore production as soon as prices begin to edge up. There will be a bounce, but the ceiling could be quite low.

The two conclusions from all this are, first, that prices revert to the fundamentals regardless of speculation; and second, that Opec countries and other producers face a long period when they can only influence prices by sacrificing their own production volumes.

There is more potential supply than effective demand, for oil and for energy in general. We live in an age of plenty and companies and investors have to become accustomed to surplus capacity and price deflation.

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