By Nick Cunningham – Oilprice.com
It’s the start of a new year and a new decade, and the oil market is as unpredictable as ever.
Will OPEC+ extend its cuts? Will U.S. shale finally grind to a halt? Is this the “year of the electric vehicle”? Here are 10 stories to watch in 2020.
Shale debt, shale slowdown. The debt-fueled shale drilling boom is facing a reckoning. Around 200 North American oil and gas companies have declared bankruptcy since 2015, but the mountain of debt taken out a few years ago is finally coming due. Roughly $41 billion in debt matures in 2020, which ensures more bankruptcies will be announced this year. The wave of debt may also force the industry to slam on the breaks as companies scramble to come up with cash to pay off creditors.
Year of the EV. Some analysts say that 2020 will be the “year of the EV” because of the dozens of new EV models set to hit the market. In Europe, available EV models will rise from 100 to 175. The pace of sales slowed at the end of last year, but the entire global auto market contracted. EVs may struggle to keep the pace of growth going, but EVs are capturing a growing portion of a shrinking pie.
Climate change. 2020 starts off with hellish images from the out-of-control Australian bushfires. 2019 was one of the warmest years on record and the 2010s was the warmest decade on record. As temperatures rise and disasters multiply, pressure will continue to mount on the oil and gas industry. As Bloomberg Opinion points out, climate change has surged as a point of concern for publicly-listed companies. Oil executives are betting against climate action, but they are surely aware of the rising investment risk. In the past two months, the European Investment Bank is ending financing for oil, gas and coal, and Goldman Sachs cut out financing for coal and Arctic oil. More announcements like this are inevitable.
IMO. Sulfur rules from the IMO kicked in at the start of the year. The rules – lowering sulfur concentration limits from 3.5 to 0.5 percent – affects a 4-mb/d market for marine fuels. Refiners and shippers have used several strategies to comply, including the installation of scrubbers and the ramp up of low-sulfur fuels. Once seen as a looming disaster, the IMO rules take effect with few hiccups, although Reuters reports there are some problems with sediment found in the new fuels.
Oversupply, oversupply, oversupply. Several markets are suffering from oversupply – coal, gas (LNG) and crude oil. While a lot of factors are at play, OPEC+ has a great deal of influence over crude. The glut of natural gas in the U.S. will be harder to correct, and gas associated with crude oil may continue to rise despite the financial wreckage in the shale gas industry. The global market for LNG is also oversupplied, with JKM prices hitting multi-year lows for the time of year. Some analysts have even raised the prospect of cancelled deliveries as spot prices continue to fall.
Renewables continue to grow. Renewables accounted for the majority of new capacity additions in the U.S. in 2019. Energy storage capacity is expected to double in 2020. Some ambitious state-level policies were announced last year, targeting 100 percent renewable energy. Roughly 10 U.S. utilities have announced decarbonization plans. Renewables vastly outperformed oil and gas stocks last year, but with falling costs and policies increasingly favorable to renewables, the future for solar and wind looks bright.
Geopolitical risks persist. The surest of sure bets, geopolitical risk will continue to loom over oil markets. The year started off with a standoff at the U.S. embassy in Baghdad, which follows the U.S. airstrikes a few days earlier. The immediate situation presents little risk to oil supplies, but the incident comes on the heels of unrest in Basra, where much of the country’s oil is concentrated. Beyond that, the crisis in Iraq is really a proxy battle between the U.S. and Iran, a conflict that has once again flared up. Civil war in Libya, sanctions and unrest in Venezuela, and more regional conflict in the Middle East are just a few of the many potential flashpoints in 2020. Related: Big Banks Turn Bearish On Oil Next Year
Trade war de-escalation. The global economy may have avoided economic recession, with some indicators turning positive in recent months. The tariff reduction between the U.S. and China also points to an easing of economic headwinds. Every twist and turn of the trade war had enormous influence over oil prices in 2019, and the thaw between Washington and Beijing provided a boost at the end of the year. A further de-escalation – or a slide back to confrontation – will exercise enormous influence over commodity markets in 2020.
Shale gas-to-oil ratio. Not only do U.S. shale drillers have financial problems, but operationally, the challenges are also mounting. 2019 saw deflated hopes surrounding well density, with a few high-profile disappointments related to parent-child well interference. There is also evidence that the tendency of shale wells to produce more gas over their lifetimes is a worse problem than previously thought. Meanwhile, the WSJ reported that shale wells are not producing as much as companies once promised. 2020 could offer more unwelcome surprises from the shale patch.
2020 election. While every election is billed as the most important in recent memory, the 2020 U.S. presidential election is. A Trump reelection would ensure unfettered support for the oil and gas industry continues, despite the worsening climate crisis. A possible Democratic victory could see a fracking ban, new regulations and other taxes targeting fossil fuels, while potentially massive support for renewables. A lot is on the line.
By Nick Cunningham of Oilprice.com