Page 20 - ISQ UK JANUARY 2020

INVESTMENT STRATEGY QUARTERLY

2020 Energy Outlook

Pavel Molchanov, Director, Energy Analyst, Equity Research

After fixating on demand throughout 2019, the oil market
is likely to start trading on bullish supply dynamics in With 2019 in the rearview mirror, we forecast that oil
2020. prices will recover to six-year highs by the end of 2020.
For most of 2019, oil prices traded rather aimlessly, averaging
approximately $57/Bbl (WTI) and $64/Bbl (Brent), well below importantly, there is an unusually bullish combination of supply-
their averages in 2018. While basic economic theory suggests side factors.
that commodities trade on both supply and demand, demand
seemed to drive oil price movements last year. Saudi Arabia is showing a degree of production discipline that
has been a historical rarity. This was true before the recent
Amid two major sources of macroeconomic uncertainty (i.e., initial public offering (IPO) of Saudi Aramco, the state-owned oil
the US/China trade war and the Brexit process) headlines company. Cynics would say it was an effort to smooth the IPO
pertaining to global oil demand played a dominant role in process; by this logic, Saudi Arabia will presumably want to
influencing prices. Consequently, the market essentially continue propping up Aramco’s stock price by supporting oil
ignored the supply side of the equation, which augured a much prices. The persistent issues curtailing supply from Iran (US
more bullish outcome. Ultimately, oil prices were largely secondary sanctions), Venezuela (internal economic collapse),
dictated by demand. and Nigeria (local militancy) seem likely to continue for the
foreseeable future. Meanwhile, as backwardated (downward-
2020: FUNDAMENTALS WILL PREVAIL sloping) oil futures exert pressure on the capital budgets of US
With 2019 in the rearview mirror, we forecast that oil prices will oil and gas companies, and thus shale drilling activity slows,
recover to six-year highs by the end of 2020. Fundamentals domestic production growth is set to slow sharply in 2020.
matter; both supply and demand matter in equal measure.
Even with the lingering US/China and Brexit headwinds, we WILDCARDS FOR OIL
anticipate that global oil demand will grow slightly faster in Whenever making forecasts about the global oil market, it is
2020 than this past year, marking 11 consecutive years of important to discuss potential wildcards. Barring a severe
growth. global recession, demand is unlikely to present much

Due to the implementation of IMO 2020 low-sulfur fuel regulations, uncertainty, whereas supply is more of a proverbial ‘black
demand for diesel is likely to be particularly robust. More box.’ In the wake of this past September's stunning drone

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