One New Year's resolution to make: Do not take the price of oil for granted.
Continue Reading Below
As we head into a new decade, complacency about the low price of oil is running rampant. This complacency is dangerous because it may catch U.S. businesses by surprise if oil were to experience a sharp upward move. Potentially this could cause a shock to the U.S. economy, mainly because we are not prepared for it and are not taking protection seriously.
|USO||UNITED STATES OIL FUND L.P.||9.78||-0.41||-4.02%|
There are reasons why many people do not fear higher oil prices in 2020 or in the years ahead. Some point to record U.S. oil production, which averaged 12.3 million barrels a day in 2019. Others point to a potential end to the OPEC, Russia and another producer alliance that led the group to reduce global supply by 2 percent by taking 1.2 million barrels per day off the market for the first six months of 2019. Others are predicting that global oil demand in the new year will fall due to alternative fuel usage and we may be seeing the beginning of a global peak for oil demand by the end of this new decade.
Despite this perception of slowing demand, crude prices are quietly having the best year since 2016. And while prices for oil are down from the highs we have seen in recent years, the outlook going forward is still quite impressive. Even though we have seen a surge in electric cars and a push for alternatives, oil demand globally in 2019 hit a record high. Even amid the U.S.-China trade war, China imported and consumed a record amount of oil.
U.S. energy production hit records last year and should again in 2020. Yet most are not paying attention to the warning signs that U.S. production might peak this year. For example, the U.S. oil rig count rang out the old year with the first drop since 2016. The drop is a potential precursor to a production plateau. Baker Hughes released its final rig count for the year and decade, and it ended on a cautionary note. They reported that total oil and gas rig count is down 26 percent from a year ago at 278 rigs. Oil rigs fell by eight per week and gas rigs held steady at 125.
|UNG||UNITED STATES NATURAL GAS FUND LP UNIT (POST REV SPLIT)||13.47||-0.62||-4.40%|
This reflects the largest issue of pain in the oil patch. Fifty energy companies filed for bankruptcy during the first nine months of 2019, including 33 oil and gas producers, 15 oilfield services companies and two midstream companies, according to Haynes and Boone's Energy and Restructuring Practice Group. Overall investment in energy and oil has plunged so expectations that U.S. oil production will easily meet demand and cover risk factors are too optimistic.
There is no doubt that electric cars are going to be a part of the energy mix in the future. The thought that we can replace the internal combustion engine with electric cars is ludicrous. While many think electric cars are environmentally clean, the reality is that for every source of energy, there is a potential environmental downside. Just think about the mining of lithium and cobalt and the production of energy it is going to take to make and supply batteries. Then, stop and think about what it is going to take to charge up those millions of electric cars. Try to fathom the impact on the power grid not just here in the U.S. but in the developing world where most of the auto demand growth will happen.
Oil prices also seem immune to geo-political risk at this time. In September, there was an attack on Saudi Arabian oil facilities. Yet the quick recovery of production and the fact that the Saudis seemed not to retaliate gave the market a false sense of geopolitical event invincibility. While this event did not cause a long-term price concern, there are signs that the risks to supply have not gone away. This week the U.S. carried out airstrikes against Iranian-backed Shiite militia groups in Iraq and Syria, which in turn was met with protests in Bagdad.
Even so, President Trump stood firm and blamed Iran for the unrest in Iraq.
The situation in Venezuela is also a geopolitical risk not to mention the old standby worries about North Korea.
All of this comes as we head into 2020 on a wave of economic optimism. Not only did the recession that many predicted last year not happen, but it also appears that the global economy will get a boost of growth as the U.S. and China work out their trade differences with the phase one agreement expected to be signed at the White House on January 15.
This wave of economic growth should cause oil demand to surge in 2020. That should lead to a much tighter physical market.
So get prepared for potentially higher prices in 2020.
Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at firstname.lastname@example.org.