The International Energy Agency (IEA) began 2020 by highlighting the challenges facing the oil market in 2020 while ignoring its strong fundamentals.
While pursuing this negative narrative it glossed over many important questions such as whether US shale producers plan to increase their production amid the current drawback in drilling rigs.
Brent crude fell sharply to $64.98 over the week while WTI retreated below the $60 barrier for the first time in a month to $59.04 per barrel. The Brent/WTI spread widened slightly to $5.94 per barrel.
The previous week’s price rise was of course caused by heightened tensions with Iran. However the ensuing correction was not because of any de-escalation in tensions, or because of the surprise build in US inventories.
In fact, prices retreated after the IEA revealed that there is an abundance of oil in the market in 2020 while oil demand growth is likely to remain weak. This was enough to dampen oil prices by around $4 per barrel on a weekly basis.
Market participants are still wondering if the downward movement will continue next week, especially considering that the IEA expects demand growth to be just under 1 million barrels per day, with a forecast surplus of 1 million barrels per day of oil.
This is a clear message from the IEA to the market that upcoming ample supplies combined with weak global oil demand growth will cap oil prices in 2020.
We have seen such messages from the IEA at the beginning of previous years whenever the new year starts with an upward momentum in oil prices. OPEC oil output last month was about 29.55 million bpd, which reflects continued over-compliance with earlier announced production cuts.
Overall, OPEC’s compliance with its cuts was 158 percent for December, according to S&P Global Platts data.
Moreover, under the new quotas that went into force on Jan. 1, OPEC’s December production would result in 108 percent compliance.
Yet some outlooks persist in forecasting a supply glut through the first half of the year and say additional production restraint from OPEC and its partners may be needed to prevent an oil price slump.
