Oil prices fall on weaker demand growth, surprise gain in US crude stocks
Global oil demand growth is projected to decelerate from 1.4 mbd in 2018 to 1.0 mbd in 2019 and 2020 as oil market continues to see robust crude production. Image Credit: Pixabay

Dubai: Oil prices are expected to average around $60 a barrel for Brent in 2020, implying the recent deeper oil cuts are not likely to make any significant upward movement in oil prices warranting further fiscal squeeze for many GCC countries, according to an analysis by economists from Institute of International Finance (IIF).

On December 6, the OPEC+ alliance, which includes Russia and several other non-OPEC oil producers, agreed on additional production cuts of 0.5 mbd [million barrels per day]. This implies that OPEC+ production would be 1.7 mbd lower than the October 2018 level. OPEC members, led by Saudi Arabia, are expected to bear the brunt of the recent cut, by cutting production by 0.34 mbd, while allies, led by Russia, will make up the rest.

Saudi Arabia’s actual crude oil production has been 0.35 mbd below its supply target for 2019. “We believe that such a cut is still not enough to balance the market in 2020. We see global liquid fuels inventories rising by about 1 mbd in 2020 after our estimated rise of 0.2 mbd in 2019. Consequently, we expect a decline in average Brent oil prices to $60/bbl in 2020, compared with $64/bbl in 2019,” said Garbis Iradian, Chief Economist for MENA of IIF.

UAE, Saudi resilient

Analysts expect the recent modest increase in Brent oil prices, driven largely by diminishing uncertainty around US-China trade and Brexit, is likely to be short-lived and will get reflected in GCC’s growth outlook.

“We expect the Saudi economy to cope well with an oil price of $60 per barrel. Although its fiscal breakeven oil price, which would balance the likely budget for 2020, is $77 per barrel, lower government spending has decreased medium-term fiscal vulnerabilities to lower oil prices,” said Jonah Rosenthal, Associate Economist at IIF.

Analysts expect global oil market conditions are unlikely to allow for a significant increase in Saudi oil production in 2020. “Should pressure on global oil prices re-emerge, the Kingdom may need to cut output further. This is the biggest downside risk to our forecast for a recovery in headline GDP growth in 2020,” said Bilal Khan, Senior Economist, Middle East North Africa and Pakistan (MENAP), Standard Chartered.

Oil prices are expected remain the most important downside risk for all GCC exporters. The positive impact of Expo 2020 on domestic consumption combined with comfortable reserves are expected to keep up the growth momentum in the UAE.

“Although further fiscal easing is unlikely, recent policy changes such as changes in visa rules and business ownership are likely to support the demand side of the economy,” said Carla Slim, economist MENAP, Standard Chartered.

Supply and demand

The oil market continues to see robust crude oil production from the USA, Canada, and Brazil, which could lead to a supply glut in 2020. At the same time, growth in oil demand is likely to remain subdued given the continued slowdown in the global economy. The EIA expects U.S. crude oil production to average 13.2 mbd in 2020, an increase of 0.9 mbd from the 2019 level.

The recent increase in inventories in the US and other major OECD countries raises concerns that the weakening of growth in the OECD and China will dampen the demand for oil.

“We expect global oil demand growth to decelerate from 1.4 mbd in 2018 to 1.0 mbd in 2019 and 2020. Growth in global demand for oil continues to be dominated by emerging and developing economies, with China accounting for half of the incremental increase and India one-fourth. Slower global growth, even with an agreement on deescalation of the trade war between the U.S. and China, could mean slower oil demand in 2020,” said Boban Markovic, Senior Analyst at IIF.