Oil price rise muted in 2019 despite sanctions, supply cuts, attack in Saudi Arabia

“Demand growth cratered while U.S. production continued to barrel along at high rates and geopolitical risk eased,” Bob McNally, president of Rapidan Energy Group.

“And now, at the end of the year, weary investors are looking to next year and seeing a tsunami of oil.”

Investor concern over peak oil demand is expected to weigh on prices next year, particularly as the urgency around action against climate change has increased. Also, a long-term resolution of the U.S.-China trade war seems elusive, keeping market watchers wary of predicting energy demand growth in the world’s two largest economies.

“There is growing concern around the long-term sustainability of U.S. oil and gas companies for investors in an ESG (environmental, social and governance) driven world,” said Greg Sharenow, portfolio manager at PIMCO, who co-manages more than $15 billion in commodity assets.

The U.S. Energy Information Administration expects average crude oil prices will be lower in 2020 than in 2019 because of rising inventories. Outside the United States, production is expected to continue to grow in Brazil, Norway, and Guyana.

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Prices did spike, but only briefly after drone attacks on Saudi Arabia’s biggest oil facility and U.S. sanctions on Venezuela and Iran. September attacks on Aramco facilities briefly pushed Brent above $72 a barrel, but within 10 days, oil prices sank back as Aramco brought production back online.

Notably, the market barely wavered in its view of where prices would end up. Implied volatility, a sign of how the market prices future gyrations in WTI and Brent CLATMIV LCOATMIV futures, was largely muted in 2019 after a see-saw 2018, a sign that investors focused on broader supply trends.

Both Brent and U.S. West Texas Intermediate (WTI) futures were locked in a $22-$23 a barrel range during the year, well below last year’s levels.

While the rate of annual U.S. production growth is expected to slow, the country should still account for about 85% of the increase in global oil production to 2030, according to the International Energy Agency. PIMCO’s Sharenow said U.S. crude supply would need to slow for the price outlook to brighten.

“If we can move down to supply growth in a much more sustainable way of about 500,000-600,000 bpd, then all of a sudden the world is much better in 12 months,” Sharenow said.