Oil Price Update and Review of 2020 Oil Market Drivers

Oil prices are likely to remain capped in the near term as market expectations for weak oil consumption growth (due to the combined impact of the decelerating global economy and the ongoing US-China trade war) are expected to continue to dominate price formation. However, the supply response to weak prompt prices is already well underway; OPEC are discussing deeper cuts, whilst tight oil production growth slows. However, 2020 will see the ramp up of long lead-time, low cost barrels from Norway, Brazil and Canada; the slowdown in tight oil production growth along with OPEC’s continued restraint therefore cannot guarantee a supportive price environment. Indeed, we forecast a call-on-OPEC production level of 29.7mn b/d for 2020 , or a further 0.26m b/d cut on our average 2019 OPEC production forecast. This is not unrealistic (the group produced a similar level in July and August this year). We consider it likely that OPEC, (led by a disproportionate cut from Saudi Arabia and continued outages from Venezuela and Iran), will produce around this level in 2020. We therefore forecast Brent to average $58/bbl in 1H20, as we expect recessionary concerns to continue to weigh on the wider oil complex well into 2020. However, the supply response to current weak price levels, as well as a pick-up in product consumption growth (which we peg at 1.1mn b/d for the balance of the year), is expected to bring the market back to balance in the second half, with prices recovering to a $64/bbl average over 2H20. Beyond 2020, the mid-term outlook will depend on whether the current slowdown in tight oil production growth is cyclical or structural. A structural slowdown would require a rally across the curve in 2021, with flat Brent prices averaging ~$70/bbl over the balance of the year. This will encourage marginal US tight oil production growth, which has slowed significantly in recent months, as well as investment in longer lead time conventional projects.