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Oil Prices in Danger of Crashing Next Year Thanks to Weak Demand

Last Updated September 23, 2020 1:13 PM
Harsh Chauhan
Last Updated September 23, 2020 1:13 PM

Oil prices were flying high when the year began. OPEC and its allies decided to reduce  their output to the tune of 1.2 million barrels per day for the first six months of 2019. Consequently, the international benchmark Brent crude oil touched nearly $75 per barrel by the third week of April.

oil chart
Brent crude oil prices have fallen off a cliff thanks to an economic slowdown. | Source: Bloomberg

Brent crude started the year below $55 a barrel and rose rapidly in a short time. But it didn’t take long for the rally to fizzle out. Oil prices were dealt a body blow by faltering demand, which was triggered by the U.S.-China trade war and the slowdown in global economic growth.

Goldman Sachs now believes that oil has very limited upside potential and prices won’t be rising significantly in 2020. However, the possibility of an oil price crash in 2020 should not be ruled out.

Goldman says oil prices are heading “nowhere”

According to Goldman Sachs, “worsening growth expectations and rising Middle East tensions” have weighed on  Brent crude in recent weeks. The investment bank added in a research note that Brent crude will continue to hover around $60 per barrel in 2020:

“Nevertheless, absent growth or geopolitical tensions escalating into meaningful shocks, we expect that Brent oil prices are likely to continue trading in 2020 around our $60 (a barrel) forecast.

The ongoing OPEC cuts and slowing shale activity will offset rising other non-OPEC supply and moderate demand growth next year.”

Brent crude oil is currently trading around Goldman’s 2020 forecast, which means that oil prices are likely to remain flat next year.

There are a number of reasons why Goldman’s prediction could turn out to be true. For instance, oil demand is expected to cool off thanks to weak global economic growth this year. The Energy Information Administration (EIA) revealed in its July short-term energy outlook that it has reduced its global oil demand growth expectations for six consecutive months.

The EIA blamed slow economic growth in important oil-consuming countries as the reason behind its pessimism. The International Monetary Fund’s (IMF) reduction of the 2019 global economic growth forecast to just 3 percent – the lowest level since the last financial crisis – indicates that oil demand growth could come to a screeching halt.

So, weak oil demand is going to weigh on prices until and unless global economic growth improves. But that looks unlikely as the probability of a recession looms large over the world economy.

Can OPEC save the oil market from crashing?

OPEC has been trying to prop up oil prices on the back of production cuts. The cartel decided in June that it will extend its production cuts until March next year to keep oil prices afloat in the wake of weak economic growth. OPEC now says that it is considering deeper production cuts in 2020 to prepare for a further slowdown in oil consumption.

As such, it looks like oil producers will try to match supply with faltering demand in 2020 in a bid to keep prices stable. But the probability of weaker oil prices should not be ruled out either, as the EIA estimates that production is all set to exceed consumption next year.

Chart showing oil consumption and production.
The EIA believes that the production of liquid fuels will outpace consumption next year. | Source: EIA

So anyone looking to invest in oil prices should think twice before doing so as 2020 could be a much more difficult year for the commodity than this one.

Disclaimer: The above should not be considered trading advice from CCN.com