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Extreme weather events may have as much impact on world oil supply, demand and prices as geopolitical risks in 2020, according to S&P Global Platts annual outlook.
Already in 2019 flooding disrupted crop planting and harvesting in the U.S. affecting economic activity and ethanol pricing, while a late monsoon in India affected demand. Hurricanes and typhoons are increasingly likely to disrupt economic growth also.
Crude oil prices may rise above $60 a barrel in 2020, but overall energy prices including petroleum products and natural gas will likely stagnate.
“With the spotlight being increasingly put on the impacts of climate change as highlighted by Greta Thunberg & the Climate Extinction rebellion, lower energy prices threaten to continue to drive increased demand for energy and challenge the economics for alternative energies and transportation,” Chris Midgley, head of analytics, S&P Global Platts said.
“Efforts by governments to increase energy prices to support the climate agenda will continue to be met by equal opposition as seen with the gilets jaunes (in France) and protests in Chile, Ecuador & Iran.”
Despite a rosier outlook for the global economy next year, supported by a weaker U.S. dollar and more constructive U.S. – China trade talks, weather will have a greater impact on energy commodity demand, S&P Global Platts believes.
Extreme heat and cold can swing demand significantly as total global energy consumption grows, and monsoons, flooding, and drought affect harvests and climate events like hurricanes and typhoons affect economic activity.
Their outlook presumes geopolitical risks, such as U.S. sanctions on Iran, will remain a threat to oil supply, while specification changes to IMO 2020 low-sulfur, bunker-fuel will provide a slight recovery in oil demand. The International Maritime Organisation (IMO) has ruled that from Jan. 1 next year marine sector emissions in international waters be slashed. Ships will have to reduce sulphur emissions by over 80% by switching to lower sulphur fuels.
Demand Factors
The forecasts from S&P Global Platts point to global oil demand growth accelerating to 1.26 million barrels per day in 2020, up from 0.95 million barrels per day growth in 2019, with growth expected in all regions except Western Europe and Japan.
About 20% of that projected growth in oil demand is associated with the IMO bunker-fuel specification change, which will push high-sulfur fuel oil, no longer allowed for use in maritime shipping, into power generation, requiring more middle distillates and low-sulfur fuel oil to satisfy demand in the shipping sector.
Jet fuel demand is forecast to rise by 140,000 barrel per day. In addition, it may benefit from the return of the Boeing 737 Max airline fleet to the skies, after the grounding curtailed airline demand for jet fuel by as much as 1% in 2019.
Oil Price
Low oil inventories, deeper outputs cuts by OPEC and its allies, and IMO 2020 regulations will see crude oil prices rise in early 2020, with the price influence of the IMO 2020 changes expected to peak in March-May, S&P Global Platts said.
These factors will likely enable the international benchmark spot Brent crude oil to break above $65 a barrel, before falling back to the low $60s a barrel by end-2020 as support from the change to the IMO regulations fades.
West Texas Intermediate (WTI) crude will likely break through $60 a barrel in early 2020, before dropping back to the high-$50s a barrel.
Brent crude futures BRNG20, -0.34% hit a 52 week high of $74.57 a barrel on April 24 this year, up from a low of $50.47 on Dec 24 last year and the futures are currently trading around $63.87 a barrel on ICE.
West Texas Intermediate crude futures CLF20, -0.12% saw a 52 week high of $66.30 a barrel on April 23 and a 52 week low of $42.53 on Dec 24 last year and are currently trading around $58.92 a barrel on NYMEX.
Geopolitical Factors
Geopolitical risks to oil supply will remain elevated in 2020, as both the US and Iran continue their maximum pressure campaigns, S&P Global Platts forecast. The U.S. is unlikely to provide Iran with any relief from sanctions before the November 2020 US presidential election, although US sanctions policy has proven unpredictable. Libya, Iraq and Nigeria remain as identifiable downside production risks in 2020.
For the UK, the looming general election on Thursday this week and its repercussions for Brexit remain a risk too, with implications for the UK’s participation in the EU Emissions Trading Scheme and UK’s overall carbon price.
The U.S. – China trade war and the African swine fever crisis in Asia will continue to impact agriculture, the latter having a significant impact on soybean demand until it can be resolved. However, after three years of sugar supply and demand surpluses globally, the world is headed to a deficit of 6 million metric tons, putting sugar in the spotlight, and likely to drive ethanol prices higher.
See also: OPEC and its allies make additional reductions to output official
U.S. Shale
US shale oil activity is slowing, as drillers struggle to make a profit at current price levels and run into capital constraints. Break even levels for shale producers hover around $60 per barrel.
Despite this, the US will again lead the world in oil production growth, growing by 1.3 million barrels per day to 20.9 million barrels a day next year. This will place domestic production above domestic consumption for the first in decades. However, the US will still be an importer of crude oil in 2020, while US exports of shale will jump 1.5 million barrels a day.
See also: IEA sees U.S. shale squeezing OPEC influence
Meanwhile, the Organization of the Petroleum Exporting Countries said in its monthly outlook on Wednesday that oil supply growth for non-OPEC countries will remain robust in 2020. OPEC held its 2020 non-OPEC production growth estimate at 2.17 million barrels a day.
The cartel also left its world oil demand growth forecast for this year and next unchanged at 0.98 and 1.08 million barrels a day respectively, and held its global economic growth forecast at 3% for both 2019 and 2020.
The report comes days after OPEC and its allies completed a new production pact to deepen their oil-output cuts of 500,000 barrels a day to last through the end of March.
That move means the coalition will hold back roughly 1.7 million barrels a day from global oil markets, and was partly motivated by Saudi Arabia’s need to bolster the initial public offering of Saudi Aramco amid sagging oil prices.
Saudi production swung during September and October after attacks on crucial Saudi oil processing facilities at Abqaiq and Khurais knocked out 5% of global oil supply, but November’s figures showed Saudi output fell by 412,000 barrels a day from the previous month.
“As the new decade begins, the first quarter may be a reprieve for an energy complex that is largely cascading towards a race to the bottom,” S&P Global Platts, head of analytics, Chris Midgley, said. “For 2020 as a whole, energy prices will struggle to post any meaningful gains over 2019, and many fuels will see sizable price declines. However, oil prices are likely to turn in the strongest pricing performance in 2020, benefitting from the uptick in demand from IMO 2020 and the commitment from OPEC to restrain supply.”
