In 2019, crude oil prices responded to multiple factors affecting supply and demand. This was as swings in crude oil inventories, OPEC+ production cuts, escalating trade tensions and a synchronized slowdown had to push and pull effects on the global commodity. As a result, Brent crude oil prices averaged $64.2/b in 2019, down 10.5% y/y.
Barely three days into 2020, geopolitics took the centre stage, as tensions between U.S. and Iran escalated, following a U.S. airstrike which killed an Iranian General. With the fear of oil assets being caught in the web of inter-country conflict, possible attacks on Middle Eastern U.S. allies or disruption at the Strait of Hormuz, crude prices climbed above $70.0/b levels before settling at $67.8/b. While tensions in the Middle East serve as a short-term positive shock, the recent OPEC+ production cuts give us reasons to believe that oil prices will average or hover around $60-$65/b in 2020 (with a greater probability lying in the mid-value of the band).
On the demand side, decelerating growth in key demand markets (China & India) remains a key cause for concern. Also, with higher oil prices, shale producers are encouraged to pump up supply, creating a potential glut. However, we could see increased tensions and actions that will keep prices at a significantly profitable level.
United Capital Research