FILE – In this Dec. 13, 2015 file photo the sun sets behind an oil pump in the desert oil fields of … [+]
Oil traders should look out below for the next 12 months.
Next year, the energy market faces a double whammy of a supply glut and lackluster demand that could send prices for crude oil down more than 10% from current levels.
While that might mean lower gasoline prices at the pump, it could put the squeeze on countries in the middle east that rely on oil revenues.
Oil glut ahead
“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,” states a recent report from the Washington D.C. think tank the Institute of International Finance.
The report, written by a team led by Garbis Iradian, IIF chief economist for the Middle East and North Africa, forecasts world oil production to expand by 1.9 million barrels of oil a day in 2020 versus 2019. More than half that total will come from the U.S.
While that increase in supply is a little less than 2% of the total, the oil market is always finely balanced, so seemingly small changes in supply or demand can have a significant impact on prices.
IIF also states that the increase in supply will not get met by an equivalent jump in demand.
“Slower global growth, even with an agreement on de-escalation of the trade war between the U.S. and China, could mean slower oil demand in 2020,” the IIF report states.
“Slower global growth, even with an agreement on de-escalation of the trade war between the U.S. and China, could mean slower oil demand in 2020,”
In other words, next year will see weak demand growth and surging supply.
As a result, Iradian and his team see prices for Brent crude, the European benchmark price, averaging $60 a barrel in 2020. That’s down 12.9% from the recent futures price of $68.71, according to Bloomberg data.
OPEC won’t help reverse falling oil prices
Don’t expect the recent agreed cuts from the Organization of Petroleum Exporting Countries cartel (OPEC) to help either.
Central to the matter is that while some key OPEC members are producing far more than their allocated production quota, Saudi Arabia has offset that overproduction by pumping far less oil than it agreed.
That ‘helping hand’ from Saudi may not last long now that it has successfully sold off a small stake in the state-owned oil company Aramco.
“We expect Saudi oil production to increase slightly in 2020,” states the IIF report., and adds that the increase will lead to a rise in oil inventories and then falling prices.
Impact of lower oil prices on investors
What does this mean for investors? There are three things to watch.
First, the lower prices will help U.S. consumers in the form of lower fuel costs. The cost of gasoline pump prices and futures prices for crude are inextricably linked over the long term. In other words, sooner or later, the falling oil prices translate into lower pump prices.
Still, as the crude market slumps expect gas prices to dip and U.S. consumers to spend the cash they’ve saved at the pump, thus helping boost the economy.
That should help lift prices of consumer discretionary stocks such as those held by the Consumer Discretionary Select Sector SPDR (XLY) exchange-traded fund. These companies, which include General Motors and Amazon.com, typically sell things that people want but don’t always have to buy, such as a new car.
On the other hand, energy stocks, such as those held in the Energy Select Sector SPDR (XLE) ETF, might not do so well because of the subdued crude prices.
Then there is Saudi Arabia and the other the oil-producing countries in the region. Lower oil prices mean lower government revenues. Unfortunately, unlike in the U.S. or European Union, there are few other sources of revenue to offset the decline.
In the case of Saudi Arabia, any oil price below $77 means that the government is spending more than it is raking in. While Saudi has a large stash of cash in its coffers, other countries have less and may feel the strain in their economies more.
In other words, investors should expect growth in the region to get hampered by falling energy prices next year.
