What Themes Will Dominate Oil in 2020?

MENA (Middle East and North Africa), the climate and ESG (environmental, social and governance).

These are three themes that will dominate the global oil market in 2020, according to research firm and consultancy Verisk Maplecroft.

“The Middle East’s explosive start to the year with a targeted drone strike killing senior Iraqi and Iranian figures, and Turkish intervention in Libya, highlight the potential for disruption risks across the entire region, encapsulating at least 35 percent of global supply,” Verisk Maplecroft’s head of MENA, Niamh McBurney, told Rigzone.

Looking at climate issues, Will Nichols, Verisk Maplecroft’s head of environment, said climate risk will continue to permeate the oil and gas sector throughout 2020 as companies come under increasing pressure from shareholders and regulators to demonstrate how they are dealing with the threat.

“Crucially, this year’s annual results will show us how closely companies are aligned with the TCFD recommendations, a set of guidelines designed to help organizations assess and disclose the climate risks they face,” Nichols told Rigzone.

“They should reveal whether strategies are in step with a global goal of limiting global temperature rise to 2C and higher risks from more frequent and intense weather events,” he added.

“With regulators threatening mandatory climate risk disclosures in the near future, investors will be watching closely to see which companies are taking the initiative,” Nichols continued.

Russ Brown, head of oil and gas at Verisk Maplecroft, revealed that the integration of ESG initiatives into the strategies of energy companies is an issue the business sees as “underplayed”.

“While energy companies are trying to offset risks to their brand related to climate change through green initiatives and attempts to limit carbon emissions, the next reputational risk waiting in the wings is likely to be their supply chains,” Brown told Rigzone.

“As investors and consumers alike continue to press businesses to implement measurable and sustainable change to their ESG practices, energy companies have largely lagged behind other industries in integrating this into their supply chains,” he added.

“The view of Verisk Maplecroft is that the energy industry needs a step change in thinking with regards to integrating ESG risks into their supply chains, or they risk the type of scrutiny from the media and NGOs that we’ve seen hit the F&B and retail sectors relating to the circular economy, environmental degradation and labor rights,” Brown continued. 

OPEC+

According to Richard Soultanian, the president of NUS Consulting Group, several important themes have the potential to impact the international oil markets in 2020, but the principal one is the overall durability of the current OPEC+ agreement.

“OPEC+ is trapped. It has no exit strategy from their agreement. If OPEC+ announces that the agreement will expire in March 2020, markets will sink,” Soultanian told Rigzone.

“OPEC+ is stuck in a negative feedback loop where it must continue to please the market with deeper and longer cuts to push off the inevitable - a material drop in prices,” he added.

“How long will Saudi Arabia be willing to reduce production for the benefit of other OPEC+ members now that Aramco has completed its IPO?” Soultanian continued.

Abhishek Kumar, head of analytics at Interfax Energy in London, told Rigzone that moves by OPEC+ to manage the oil market will be a key theme this year.

“The group will have a challenging task ahead,” Kumar said.

“Saudi Arabia and its Gulf allies will push to extend or deepen the output-cut agreement. However, this will be resisted by countries such as Russia who are worried about losing their share of oil market to nations that are not part of the cartel, such as the U.S. and Brazil,” he added.

Kumar also mentioned that several oil producing firms in the U.S. are facing mounting debts, “which could see a wave of consolidation in 2020” and noted that the ongoing Sino-U.S. trade war will remain a source of demand-side concern for the oil market this year.

Source: Rigzone