Oil demand to rebound in 2020
Macroeconomic factors promise to boost oil requirements and bolster prices, which may see the market spring a surprise
Oil prices in 2020 will recover smartly from late 2019 levels, as demand regains its mojo and supply growth continues to moderate. A weaker US dollar—brought about by globally accommodative monetary policies and a reduction in economic policy uncertainty—also will support prices.
As such, BCA Research forecasts 2020 Brent prices averaging $70/bl, well above a consensus forecast of under $62.40/bl produced by over 50 economists and economist survey in an October Thomson Retuters poll.
The recovery in the benchmark oil price is premised on a relatively upbeat assessment of supply and demand dynamics next year—production discipline by Opec+ and capital market restraints on US shale—oil output will moderate supply growth; globally accommodative financial conditions will support demand growth.
Supply and demand
On the supply side, the market should expect Opec+ crude output to average 29.6mn bl/d in 2020, down by c.300,000bl/d from 2019 levels. In the US, shale oil output is expected to grow by just 900,000bl/d in 2020, compared to 1.3mn bl/d growth in 2019, and overall US crude output will average 13.3mn bl/d. US supply growth will account for most of the 1.5mn bl/d increase in global output we expect for next year, which brings total output to 102.3mn bl/d.
Empirical and theoretical arguments support a forecast of 1.4mn bl/d of demand growth in 2020, with 1.1mn bl/d of that coming from emerging markets (EM). First, our EM commodity demand ‘Nowcast’–a combination of global trade and manufacturing data, econometric outputs and FX rates–indicates EM growth bottomed out and hooked up in the second half of 2019. Secondly, macroeconomic theory argues consumption of industrial commodities (oil and base metals) in EM economies will increase in 2020. The global monetary stimulus deployed in 2019 will counteract the tightening of global financial conditions resulting from the Fed’s rate hikes in 2018 and China’s deleveraging campaign in 2017-18. Fiscal stimulus also is supporting global demand growth.
Reducing economic uncertainty
Economic uncertainty, as the global economy experienced in 2019, is destructive of demand, and will remain a key factor for prices in 2020. While we do expect economic uncertainty to decline next year, it will remain a pertinent issue due to Sino-US tariff tensions, ongoing hostilities in the Mid-East Gulf, and popular discontent with the political status quo globally. But any reduction in economic uncertainty will aslo translates to lower safe-haven demand for the US dollar (USD).
Oil is denominated and invoiced in USD, and a strong USD–measured using the Fed’s broad trade-weighted index for goods–pushes oil prices ex-US higher by raising the local-currency cost of oil for consumers, depressing demand. It also lowers, in relative terms, costs for commodity producers in local currencies, encouraging additional supply at the margin.
Monetary policy will have to remain accommodative for the momentum in global growth– mainly in EM economies–to be sustained. Our research indicates that, in 2017, the GEPU index became highly correlated with the broad trade-weighted USD and negatively correlated with EM trade volumes. This latter relationship is a new finding of some importance, as EM import volumes are highly correlated with EM income. Growth in EM income drives oil demand growth. Higher economic uncertainty pushes the USD higher, which reduces EM income and commodity-demand growth.
For the USD to no longer be a headwind to oil-demand growth, globally accommodative monetary policies will be forced to offset lingering global economic policy uncertainty that keeps the USD well bid. So far, it would appear this is happening, given the improvement in global financial conditions currently visible in the data. However, it is not a given this will continue. Markets will be forced to keep a weather eye on these conditions going forward.
 We measure this using the Baker-Bloom-Davis Global Economic Policy Uncertainty (GEPU) index. The GEPU GDP-weighted index of newspaper headlines containing a list of words related economic uncertainty. Newspapers from 20 countries representing almost 80% of global GDP are used. Please see GEPU and Baker-Bloom-Davis.
Robert P Ryan, Senior Vice-President, Chief Commodity & Energy Strategist, BCA Research