Oil and Gas Outlook 2020: Geopolitical Volatility to Keep Impacting Oil

The oil sector saw another volatile year as geopolitical tensions bolstered Brent crude prices. West Texas Intermediate (WTI) crude experienced less price volatility than Brent, but transport constraints on land and sea prevented the world’s largest producer from increasing exports.

In January, WTI was at its lowest point for the year, selling for US$45.41 a barrel, while Brent also started the 12 month period at its lowest point, US$53.80.

Conversely, the natural gas story has been the opposite of oil. The fuel started 2019 close to US$3 per million British thermal units and ultimately took a tumble.

Oil and gas outlook 2020: Natural gas performance review

The price of natural gas is usually higher in the winter and trends lower in the warmer months because its primary use is as an energy fuel to heat homes.

Unsurprisingly, natural gas hit its year-to-date high in January, when it reached US$3.04. Prices subsequently trended lower month after month until mid-September, when prices began to climb again ahead of the colder months.

However, increased production in the US has kept prices lower than expected, and to date the price for natural gas is 28 percent lower than it was in January.

US output has grown by 44 percent over the last decade, and along with new offshore projects and increased refinery capacity has contributed to the oversupply that is weighing down the market.

The main gas markets for the US continue to be neighboring countries Canada and Mexico, and the US Energy Information Administration (EIA) remains confident that US exports will steadily increase.

“(The) EIA’s Short-Term Energy Outlook (STEO) forecasts that US net natural gas exports will average 4.7 billion cubic feet per day in 2019 and 7.5 billion cubic feet per day in 2020, with most of the growth attributable to increases in LNG exports. However, pipeline exports of natural gas are also increasing,” states an EIA report released midway through 2019.

Currently, the value of natural gas is US$2.21.

Oil and gas outlook 2020: Oil performance review

While natural gas prices were hindered by production growth, a number of factors impacted the price movement of oil, including a drone attack on Saudi Arabia’s largest oil field, transport issues in the Persian Gulf and domestic pipeline bottlenecks in Canada and the US.

This sector-wide volatility helped Brent rally 25 percent this year, while WTI is up 35 percent year-to-date.

Despite the gains made in the oil industry, many sector watchers and companies had expected a more marked correction to happen over the 12 month period.

“Unfortunately, like many economists and analysts, our expectations fell short in 2019 regarding corrections,” Mehran Ehsan, CEO, director and president of Permex Petroleum (CSE:OIL,OTC Pink:OILCF), told the Investing News Network.

“However, that being said, we still believed in a steady upward correction this round versus the more aggressive corrections we typically had seen in the past 50 years. Keep in mind every eight to 10 years, just like a business cycle, our industry goes through such corrections. Sometimes aggressive in nature and sometimes moderate. This recent correction has been quite aggressive and (has) lasted much longer than anyone had anticipated.”

The executive from the junior oil and gas company, which has projects in Texas and New Mexico, noted that the prolonged correction has been especially challenging for smaller players in the space. Ehsan sees the lack of flexibility by the juniors as one of the headwinds the space experienced.

“We noticed hundreds of junior and mid-cap companies file for bankruptcy because they didn’t follow the cardinal rule of an oil and gas operator, and that is being nimble enough to go with the punches during a down cycle, sustain and grow,” he said. “These companies could not weather the typical down cycle, which usually lasts between two and three years, (although) the current one has lasted five years so far; as such, filing (for) reorganization or a full out bankruptcy was their only option.”

Mercenary Geologist and sector watcher Mickey Fulp believes that the struggles the juniors faced in 2019 are a symptom of a bigger issue. “Any downturn in US production is going to come because of the underperformance of the explorers and producers (E&Ps),” said Fulp.

In what Fulp described as a second wave of bankruptcies — the first of which occurred in 2014 — a significant number of companies were unable to remain solvent over the calendar year.

“(Oil) E&Ps are the worst performers of all the US stock market this year,” said Fulp. “It’s just typical capitalism — when prices are high and things are going well, people throw money at these things much like the mineral industry. It’s a capital-destructive business.”

Oil and gas outlook 2020: The year ahead

The prices of both WTI and Brent have remained steady for much of December, locked into the low to mid-US$60 range; however, ongoing trade tensions with China, as well as drone oil field attacks, could move prices higher in 2020 as instability mounts.

“Since the global economic crisis, we have had very volatile oil prices for a decade, so it’s very susceptible to geopolitics, the geopolitics of a very unstable part of the world,” said Fulp. “I expect it to be volatile in the coming years.”

In mid-September, Saudi Arabia’s oil output was cut in half following drone strikes at the Saudi Aramco (TADAWUL:2222) facilities.

The airborne assault on the world’s second largest producer removed 5 percent of global supply from the market — 5.7 million barrels a day — and sent prices for both Brent and WTI higher over fears of a shortage. Libya’s oil sector faced a second smaller attack later in the year.

Add to this the US’ ability to produce a cleaner product for a reduced cost, and it’s easy to understand why prices remain volatile and likely will stay that way for the short term.

However, as Fulp noted, transport issues in terms of pipelines and tanker capacity have created a bottleneck in the southern states, preventing the US from increasing its monthly oil exports.

“The demand for WTI is as much as we can produce and export, and so we are constrained right now in the Permian Basin,” he said. “We are constrained by lack of pipeline capacity and also lack of sizeable port facility in the gulf coast from Corpus to Houston, from Beaumont to New Orleans, but that is coming — we have pipelines in process coming online, more coming online in 2020.”

Even though juniors have struggled in the current market, the oil sector recorded the largest IPO in history this year when Saudi Aramco, a state-run oil company, went public.

“It’s been wildly successful, so good on the Saudis. I think it ended up that they only spun out about 10 percent of the company, but it was still the biggest IPO in the history of any stock market; it kind of tells you how big they are,” Fulp commented. As of mid-December, Saudi Aramco had a valuation of US$2 trillion, making it the most valuable company ever.

At the end of December, WTI was selling for US$62.14 and Brent was valued at US$67.39.

Like 2019, 2020 will likely hold headwinds for the oil sector in terms of reduced gasoline-powered automobile sales, continued geopolitical unease and pipeline issues in North America. However, Permex’s Ehsan remains optimistic that the US will continue its sector dominance.

“I truly believe we will see a balanced market when discussing supply and demand in 2020,” he said. “The US will continue to dominate US growth, but definitely not in the massive growth trajectory we witnessed in the past four years.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Permex Petroleum is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.