The price of benchmark Brent oil has averaged $79 a barrel over the last decade. The financial crisis, an unforeseen surge in US shale production and a combustible Middle East defined the period for oil markets. The next 10 years could be even more volatile for the world’s most important fossil fuel.
Despite the dramas of the last decade, crude prices are set to close out 2019 well below the 10-year average.
In 2010, the outlook for demand looked just as uncertain as it does today in the wake of what became known as the Great Recession, when global GDP fell by 5.1pc and oil consumption dropped by 1.6pc in 2009. Low oil prices helped trigger the Arab Spring uprisings, which started as bread riots in Tunisia before China’s economic stimulus helped catapult the value above $125 a barrel.
Then, as now, the oil industry was criticised for its environmental impact following BP’s Deepwater Horizon blowout, which resulted in almost five million barrels of crude spilling into the Gulf of Mexico.
At the dawn of a new decade, many of the challenges facing the oil market look very similar to those in the last. Global warming could force producers to keep oil in the ground unless new carbon capture technologies can be developed to remove emissions from the atmosphere, or draconian measures are taken to sharply cut consumption.
“As we enter a new decade, the energy complex feels like it is all cascading towards a race to the bottom,” wrote S&P Global Platts Analytics in a research note. “All energy commodities are competing for a share of finite downstream demand. At the same time, continued growth in renewables, efficiency gains and increased penetration of EVs [electric vehicles] and hydrogen will limit the overall call on fossil fuels.”
The growth of electric vehicles could start to eat into demand for fossil fuels in passenger transport by 2030, according to some forecasts. Meanwhile, changes to reduce the levels of sulphur in marine fuels coming into force in 2020 will help to clean up the world’s shipping lanes and transform a sector which accounts for about 5.5m barrels a day of oil demand, according to Platts Analytics.
In the Middle East, where about a fifth of the world’s oil originates, the political environment looks evermore unstable. Attacks on key infrastructure in Saudi Arabia and tankers anchored near the Strait of Hormuz throughout 2019 have highlighted the ongoing risks to the world’s most important supply basin. Meanwhile, Iran’s crude remains frozen out of world markets by US sanctions.
Opec’s alliance with Russia will be tested over the next decade. With Moscow’s help, the group has disguised its chronic decline in market share and influence. Coordinated action orchestrated between Riyadh and the Kremlin increased cuts to 1.7m barrels a day until the end of March. Holding together its Opec+ pact beyond 2020 will be vital for the cartel’s future throughout the decade.
US oil production is likely to continue to shape world markets. America is now producing more crude than Saudi Arabia but its success could ultimately be its undoing. Lower oil prices, caused partly by the shale revolution, have started to hit the prolific Permian Basin, where rig counts have fallen and operators have cut spending. But Platts Analytics still expects the US to record the biggest gains next year, with supply expected to grow by 1.3m barrels a day.
“This will place domestic production above domestic consumption for the first time in decades, but the US will still be an importer of crude oil in 2020, with exports of shale jumping 1.5m barrels a day. Sanctions on Iran and Venezuela will hold throughout the year, while Saudi Arabia will lead the rest of Opec+ to greater supply restraint (and the fourth year in a row of Opec declines) in its last great opportunity to support prices,” said Platts Analytics.