While events concerning Iran, or indeed Libya and Venezuela, may cause some short-term price volatility, it is the export volumes from the United States and Saudi and the demand trend that will most likely determine the price average in 2020.
“The stark fact is that despite the threat of a military conflict between the US and Iran, which at least for now appears to have receded, Iran is no longer an oil exporter,” Chris Weafer, founding partner of Macro-Advisory in Moscow told New Europe, adding that Iran has become irrelevant in the global oil market because of the harsh US sanctions.
“For oil traders the only question is whether a future escalation could disruption the flow of oil from the region to the global market. The answer is either ‘only briefly’ or ‘not at all’. Traders are now shelving Iran risk and returning to the more basic equation of supply from the US and Saudi Arabia and demand growth,” Weafer explained.
The oil price ended 2019 strongly because of the deal expansion between the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC oil producing countries led by Russia, a group known as OPEC+, and optimism that demand growth will again exceed 1.0 million barrels per day in 2020. Brent gained 26.5% since the start of the year with more than half of that coming after the OPEC meeting.
Justin Urquhart Stewart, director at Seven Investment Management in London, told New Europe the big theme in 2020 is going to be the trade issue and that particularly affecting US President Donald J. Trump’s attempts to win his re-election. “That’s going to be uppermost in his mind so he will do whatever it is necessary to get his message across that it has been a great success so the market will look at it and it’s interesting to see the reactions in terms of performance, in terms of profitability and it’s not really showing any great improvements in the large corporates. So, it’s fascinating that we’re seeing price rises of investment rising and the economy though is showing signs now of moving into a definite slowdown for 2020. That will impact on the oil price,” Urquhart Stewart said.
US sanctions created space for US exports. But, while the OPEC+ deal has been very important in keeping the oil market in balance, the biggest factor in 2019 was the tightening of US sanctions against Iran and Venezuela, Weafer said. In aggregate, 1.1 million barrels of crude was cut because of these sanctions and that accounted for a big part of the 1.5 million barrels per day gain in US oil production and exports, he said, adding that without this, OPEC would have had to cut more oil or risk a much lower oil price average.
Russia will probably continue cooperating with OPEC in 2020. The political benefits, in terms of close political relations with Saudi Arabia and the Emirates and future trade and investment deals, are very important for Moscow, Weafer explained.
“But we may see a slippage in compliance with the deal. The Russian oil majors are not happy with the deal as they see it mostly benefits the US exports and is preventing them from opening up new fields. Russia was able to report full compliance in 2019 because of the Druzhba pipeline disruption in the spring and early summer. Without this the compliance level would have been relatively low,” Weafer said.
Nord Stream-2 to be completed in 2020
Nord Stream-2, a pipeline that will transport gas from Russia to German will be completed despite US sanction. The remaining engineering work is less difficult and Russian gas monopoly Gazprom should be able to source enough equipment to get it finished, Weafer said, adding that there is a deadline of May 2020 to start delivery of gas and, at this stage, there is no reason for that timeline to be missed.
“It is strange that the US Senators who proposed the sanctions should have waited so long. Had the sanctions been passed earlier in 2019, when the legislation was first introduced, or almost anytime up to the autumn, then the project would now be no more than a metal skeleton on the floor of the Baltic Sea,” Weafer said. “It would appear that Congress wanted to make a point … and probably take credit for ‘forcing’ Moscow to agree a transit extension with Ukraine, which it did not of course, while stopping short of really damaging US-German relations,” he said.
The rift between Berlin and Washington is unlikely deepen despite US-sanctions against Nord Stream-2. Germany is very clearly annoyed at the US attempt to block the pipeline but the fact that the sanctions have come too late to actually stop it should mean that any lingering damage will be containable and, most likely, repairable, Weafer said.
Russia is going to continue to be a major supplier to Europe, especially after the extension of the gas transit agreement via Ukraine, Nord Stream-2 and TurkStream pipelines.
Future of US LNG in Europe in 2020
According to Weafer, the only way that Europe will meet its CO2 targets is by increasing investment into renewables and using more gas, i.e. assuming nuclear stays off the agenda. It means that Europe will not only need more gas from Russia but will also be a bigger importer of liquified natural gas (LNG) – some of that LNG will come from the US and some will come from Russia. “Now that the major pipelines are completed, I expect Russia to focus much more on LNG plants and to be a much bigger supplier of LNG in the decades ahead,” Weafer said.
Moreover, the TurkStream pipeline will most likely be completed and become operational in Europe. The first branch of TurkSteam is now filing gas for the Turkish market while the construction of the extension, the branch of TurkStream has started. The existing sanctions do not affect the pipeline as it is almost entirely overland and local resources can be used to compete each section, Weafer said.
“Just as it is strange that the US Congress left it so late to sanction Nord Stream-2, it is equally strange that Brussels has ignored Turkish Stream 1 and 2. It is essentially the abandoned South Stream pipeline, against which Brussels was vehemently opposed. But they seemed satisfied that the project with that name has been killed and completely ignored the fact it was simply moved and renamed and now well underway. Without even a whimper from Brussels,” Weafer said, adding: “Perhaps somebody finally understood the reality of what is required to meet Europe’s environment targets.”