The outlook in less than 60 seconds....

Oil production cuts, trade war as well as geopolitical tensions are all factors which have affected oil prices in the past year. Though the trade war between the U.S. and China seems to be easing, tensions between the U.S. and Iran have flared as we started the new decade. Where the trade war tends to weigh on oil prices, the geopolitical tensions support oil prices.



Many emerging economies are developing quicker than expected and are using more oil in the process of keeping growth alive, this include large developing countries like India. The demand for oil is, however, not  as strong as previous years, e.g. in 2017, where the growth in demand for oil was around 1.6 mb/d. 

The number of U.S. shale oil rigs is declining while the overall U.S. crude production has been trending upwards during 2019. 

"The number of U.S. rigs is declining, and  oil prices saw a  big setback at the start of 2019 and later rebounded, to “stabilise” at a bit higher levels."

Oil supply 

In the beginning of December last year members of OPEC and some OPEC+ members agreed to not only extend but to intensify a deal to jointly keep oil production cuts in place. OPEC and OPEC+ agreed to cut further 500,000 bpd of oil until the predetermined deadline of March 2020.

The total production cut after the additional deal is now 1.7m bpd up from a total of 1.2m bpd. In addition there could be voluntary cuts bringing the total to nearly 2.1 mbpd. For the most part this will likely be Saudi Arabia, and it will only happen if other countries stick to their agreed production.

The decision to further curb oil production has been made after the group of oil producers had discussed the developments on oil markets since their last meeting which took place in the start of July 2019. Furthermore, the group talked about its predictions of global economic growth and growth in global oil demand, which the group set to approximately 1.1m bpd in 2020. The agreement will be reviewed by the group in the beginning of March 2020.

A large part of oil production outside of OPEC and OPEC+ has primarily been produced by the U.S. Especially the Permian Basin of West Texas and basins in southeastern New Mexico have increased. However, the output from the before-mentioned basins seem to show weaknesses as some companies and operators pull back on ambitious growth plans as production is less profitable than anticipated. More on this in our annual shale oil production special at the end of this report. The U.S. Energy Information Administration (EIA), anticipates that the U.S. oil production growth rate will fall throughout 2020, the main reason being a decline in how many oil wells and rigs are active in the country. Other countries who are now contributing to oil production growth in 2020 are Brazil and Norway.

 Graphical illustration of US Rig count

The shale oil boom became apparent in the United States in 2016, however in the whole year of 2019, active oil rigs in the U.S. have been on the decline. One of the reasons why this is happening will be touched upon in the upcoming shale production special.



Demand for oil has slowly regained its position but remains well below pre-pandemic levels. The outbreak of the pandemic lead to a sharp decrease in oil demand as worldwide lockdown measures were implemented. The sharp decline was however, quickly followed by v-shaped recovery, which is often looked upon as best-case-scenario given a recession. The recovery can in large part be attributed to demand from China, which we will analyse further in the next section as well as demand from India.  The U.S. and OECD countries are another story, however as re-imposed lockdown measures appear to have taken their toll and especially on Europe, where 4Q20 oil demand was weaker than the 3Q20 demand was. 

World oil demand is anticipated to decline between 8.8-9.8 mb/d in 2020. As uncertainty continues to rule the landscape going into 2021, forecasts on demand in 2021 should be viewed accordingly. Reports suggest an increase in demand in 2021 between 5.70-5.90 mb/d, which is a reduction of approximately 3 mb/d compared to 2019 levels. A large part of the contraction is attributable to a decline in transportation fuels, which we probably will see reach 2019 levels in 2021, but more importantly a huge loss in demand for jet fuel that reports suggest are accountable for 80% of the 3 mb/d loss in 2021 vis-à-vis 2020.  

Fundamental summary

Slightly bullish

Crude oil demand is expected to rise in 2020. With approximately 1.2 mbpd, the forecast growth is slightly smaller than what it was for 2019, where the demand was forecast to be 1.4 mbpd. The deepening of production cuts by OPEC+, together with an increase in demand might put upward pressure on oil prices.

Some uncertainties exist whether or not the deepening cut by OPEC+ was large enough, and whether or not we will eventually experience a glut that could drive prices south. There is undoubtedly going to be a large portion of volatility in regard of the prices, but we set the fundamentals to be slightly bullish.


2019 has been somewhat a more stable year compared to 2018, but with numbers coming out of large economies such as Europe, the U.S. and China not looking particularly satisfactory. We will dig into the details for the state of the economy in the following part.


United States

To start off, the analysis looks at the development in the quarterly growth in gross domestic production within the U.S.. As can be seen in the graphical illustration below, the quarterly growth in GDP edged slightly higher in the U.Ss than the previous quarter. Looking towards the end of 2018 and the start of 2019, however, , where GDP was volatile, GDP seems to have been steadier these past couple of months. The more stable sentiment in business behavior is probably in part due to the economic stimulus the Fed, the U.S. central bank, provided, by lowering the interest rate two times, and chose at their latest meeting in October, to keep them stable.

US GDP Growth QoQ

It is also quite valuable to gaze upon the Purchasing Managers Index or PMI for short. As can be interpreted on the graph below, the PMI numbers has been on a downward throughout most of 2019 with few exceptions. The PMI indicator does, however, seem to be hovering around a measure of 48 which is not necessarily bad, as this number can quickly be reversed into positive territory. The trade war between China and the United States may bear some of the blame towards the decline.

Normally if the index is above 50, managers throughout corporations believe in further growth within their business, thus investing more, producing more and employing more people. However, since this indicator is as of now in decline, this indicates some bear signals on oil demand from American companies, as oil demand also depends on the consumer purchasing power. If people were to spend more, the companies would earn more and thus have the need for expanding their business to follow demand on their products.


Fact Box: "The PMI (Purchasing Managers’ Index) is an indicator of economic health for manufacturing and service sectors. The purpose of the PMI is to provide information about current business conditions and is based on five major survey areas: new orders, inventory levels, production, supplier deliveries and employment. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change."

As mentioned briefly earlier, the Fed did intervene by changing interest rates. Up until the end of July this year, the Fed had increased and kept the interest rates steady at the 2,25% - 2,5% interval. Since the American economy began in July to show signs of weakness, the Fed decided to pull back on the monetary contraction and started loosening monetary policy, which let to drops in the interest rates.

Thus, the interest rates are now back in the range between 1.5% - 1.75% which is like April 2018. For now, the Fed is keeping interest rates steady around this level. Lower interest rates could in general incentivise companies to invest more, but since PMI is falling into negative territory, some companies might not be willing to invest that much now even though interest rates are low.

Unemployment rate US



To follow the outline of the U.S. economy we will highlight the same measurements for the European economy, starting off with the GDP. As is seen by the graph, the GDP growth in Europe has been declining since mid-2017. Europe continues to suffer under declining PMI numbers among other things. A decline in the GDP growth is the most valid determinant of the general economy. As we will depict further on in the analysis, the European Central Bank (ECB) has been trying to boost investors’ confidence and get investments rolling into the economy with even lower interest rates. As of now, this has not paid off, it seems. We will analyse this in more depth later.



The PMI number in Europe has been under the crucial 50 mark since late 2018, which indicates that the European economy has been contracting since that period. Throughout 2019 we have seen a small decline to a low point of 46 in September, with a small rise to 47 in November. The most worrying of the graph is that Europe has been in a steady decline for two years straight, and one should be mindful of that fact. However, it is to be noted that the index currently still is not far below the contraction level of 50, which indicates some strength left within the economy, it is particularly good to see a small pickup towards the end of 2019.  The rise is not insignificant, time will show whether it is sustainable over a longer period.


PMI Europe


A major tool the ECB has been using in order to get the economy back on track is the negative interest rates. In effect, what this should do for the economy is making accessibility to capital cheaper, hereby encouraging investors to invest more. What the ECB likely hopes for, when decreasing the interest rate, is not only more investments, but also that the multiplier effect will set in, and that investments will generate a large amount of other growth effects in the economy, such as more jobs, higher GDP, higher disposal income and so on.

Fact Box:“The Multiplier Effect”. Whenever the ECB or any kind of government uses expansionary fiscal or monetary policy in order to stimulate the economy, the end goal is to get all aspects of the economy into betterment. As you decrease the interest rate, you inject cheaper capital-availability into the economy, which hopefully mean that investors use this newly available cheaper capital to invest in businesses to grow. Theoretically, these businesses then hire new people to their growing businesses, the new people are then receiving salary, which they can spend into the economy once again. With just one adjustment, you have the possibility to help many aspects of the economy."


It is not always the case, however, that monetary stimulus is enough to remove an economy from a deadlock, as is the case of Europe. The interest rates have long been negative, but the rest of the economy has not picked up on the stimulus. There can be multiple reasons for such a scenario. A large part can be put on economic and political uncertainties, which discourage investors from taking risks. The ECB specifically has been calling upon governments to support their monetary stimulus with fiscal stimulus to really get the economy going. The declining unemployment rate is a positive factor in the European economy, as we have seen a slow decrease in unemployment the past two years. The decrease in unemployment has been stagnating throughout 2019 but is still trending downwards on an overall European level.

Unemployment rate EU



GDP QoQ China


The GDP growth in China has been relatively volatile in the past years. A part of this volatility stems from the riveting growth China has been through. It looks like the trade war has had its toll on the economy, and with China being one of the world's largest oil consumers, this could be one reason why oil demand growth is wearing a bit off.

PMI China


As in the case of Europe and the U.S. the PMI numbers coming out of China have been indicating a recession for some of 2019, but has picked up in 4Q19 just breaching the crucial 50-mark point. Relatively positive trade talks might be one of the reasons for this, also indicating the cruciality of open trading between the U.S. and China in regard of their economy.

Emerging Markets

Fact Box:"Emerging Markets consist of: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, and Turkey."

Taking a focus on India, the Indian currency has not been as poor against the dollar as was recorded in our last annual outlook.

USD/INR (Indian)


A stable currency helps emerging markets in many ways of which some is that they can better pay their debt which is typically lent in USD. As India is also a very large economy, we will take a look at the crude import statistics for 2019. Looking at the graph below, the imports in India have been stagnating throughout 2019, but has picked up towards the end of 2019, indicating a small pickup in demand for oil in India.


India Crude Import



The financials are set to bearish

All in all, the financial outlook looks sluggish around the world, and we set the financials rather bearish. The bearishness stems from low PMI numbers in the U.S. and Europe, as well as China. We also see a decrease in interest rates in both Europe and the U.S. as the central banks are trying to get the economy to pick up.. One of the more positive signs from both the U.S. and Europe is the decline in unemployment rates, which indicates that businesses are in need of further employment. Countries like India is one of the countries making sure that the demand for crude oil is still growing. In general, Emerging Markets are currently the main driver behind demand for oil, as the economies in these countries are expanding rapidly.

"The financial outlook looks sluggish around the world, and we set the financials rather bearish."



China / U.S. trade war

Political tensions that have been disturbing the oil markets have also disturbed the economy as a whole. Since the current U.S. administration first introduced tariffs on China in 2018, putting emphasis on trying to reduce the U.S. trade deficit, the global economy has been hurt. Throughout 2019 the U.S. has imposed higher tariffs on specific products imported from China, rising from 10%, which were implemented in 2018, to 25% in June 2019. In September the U.S. introduced new tariffs of 15% on a subset of other products. The products from China, that were tariffed, have seen a decline in import by 25%. China did indeed retaliate with their set of tariffs on U.S. products.

The huge number of tariffs have since meant lower amount of capital being available to allocate into new projects or productions. This is further viewed in the demand for oil, which is especially the case when the trade war is between  two of the largest economies in the world. Had we seen the same trade war scenario with smaller economies, the effects would not have been anywhere near what we are experiencing now.

 China Crude Import


It is worth noticing that even though the crude import has increased in China throughout 2019, the trend is still upwards.


The U.S. and Iran conflict

In 2018, the U.S. withdrew itself from a deal giving economic relief to sanctioned countries, worried to be developing nuclear weapons. The tensions seriously flaired at the start of 2020, after the U.S. killed the leader of the Iranian Revolutionary Guard Corp in a drone attack in Baghdad. The killing has sparked outrage at the highest level of government in Iran with several front figures warning a retaliation. The oil markets will surely follow the development closely. There is concern that Iran will target oil facilities, as they did with Saudi Aramco back in October, which would of course have its effects on markets. The conflict is currently ongoing in Iraq, between Iran and the U.S., all countries which makes up a large part of the worldwide oil supply, so it is not unreasoned that concern is arising on oil price development with the escalating conflict.



Geopolitics is set slightly bullish

The geopolitics indicate rising uncertainties on different levels. There is some progression in the trade talks between the U.S. and China, but the progression will come in different phases and a lot of uncertainties lie ahead for a full agreement to be reached. The smallest hiccups in the talks could have anything from a short-term to long-term effect on markets. The tensions between the U.S. and Iran have the implication of driving the oil markets in different direction, but the recent events in the area has us setting the geopolitical risk premium as bullish. The area contains some of the largest exporters of crude oil in the world, and uncertainty in these areas will have its impact on markets.

Oil price forecast

Oil price forecast (average)

 Price forecast 2020

Please note that the forecast is the AVERAGE price per quarter. Thus, prices during the quarter will likely be both higher and lower. 

Brent forecast and prices (USD per barrel)

 Forecast 2020

Scrubber Special


On January 1st, the International Maritime Organization has set new standards if a ship or vessel is using heavy fuel oil, which is fuel products that go under the 3.5% threshold name.

Scrubbers are air pollution control devices that can remove unwanted pollutants from a gas stream with the help of liquid.

According to sources a total of 3,756 ships have installed scrubbers to comply with the new regulations. However, only 23 of the mentioned vessels is said to have installed closed-loop scrubbers. Closed-loop scrubbers are the opposite of the open-loop scrubbers. Instead of emitting sulphur into the atmosphere, an open-loop scrubber reroutes the sulphur from the exhaust into the sea, contrary to a closed-loop scrubber which stores the extracted sulphur into tanks which is then safely discharged at a disposal facility when the vessels dock at a port.

The largest percentage of vessels which have implemented scrubbers in anticipation of 2020 are larger vessels such as bulk carriers, container ships and oil tankers which are known for having the biggest engines and often are on long journeys on open sea. Cruise ships are another sort of vessels which use heavy fuel oil. ICCT, an NGO research body producing research on maritime life and scrubbers, estimate that of the world's roughly 500 cruise ships, around half of these ships will have or will soon have the new scrubber technology installed, however, many of them the open-looped ones.

Scrubbers cost between £1.6m and £8.1m depending on the size and how new the vessel is, where open-looped scrubbers are generally cheaper than closed-loop scrubbers, however, some vessel owners should keep notice of this, as even though an open-looped scrubber is within the IMO 2020 regulation, some countries are still said to be banning or severely limiting the use of ships using open-looped scrubbers. China has said it would ban scrubbers to discharge sulphur waste in all coastal regions within 12 nautical miles from China’s territorial sea and regions. Belgium, Germany, Ireland as the United States have also implemented bans on scrubber discharge in some regions.

Basically, vessels can keep using 3.5% fuel if the vessel has installed either of the scrubbers. The price of the 3.5% fuel oil is generally cheaper than 0.5% fuel products which vessels must sail on, if they do not have a scrubber installed. Failure to comply with the regulation will cause fines for the vessel and the shipping company for which the vessel operates. The new 0.5% fuel has not priced just yet, since there is still much uncertainty in this new fuel market, as these products have not been traded up until now. Expect volatility on these products in the coming months.

Shipping companies have three different options which are 1. Changing to using ultra-low sulphur fuel oil, 2. Fitting an exhaust scrubber, or switch to Liquid Natural Gas. IMO is part of the United Nations which has no right to enforce this regulation, which leaves it to the individual ports to choose if they want to comply, and thereafter must regulate the ships entering their ports. If low sulphur fuel is not available in the specific port where a vessel sails into, the vessel can be granted a waiver which allows it to sail on heavy fuel oil till the next port, where the vessel needs to unbunker the fuel, clean their tanks and bunker new ultra-low fuel oil which makes it a quite costly maneuver. Since open scrubber still affect sea-life worries are that open-looped scrubbers may be banned in the future by the IMO, however changes to IMO 2020 will only affect new scrubber installations and not already implemented ones.


Ships with scrubbers


Shale Production Special


In our Q4 report, we conducted our take on shale producers in general and the profitability of this.

Fracking, which is the chief method used for extracting oil where traditional drilling is not a viable option, has higher costs associated with it, thus when oil prices decrease to under the breakeven point, fracking does become unprofitable.

Production pr. Basin

Since the discovery of shale technology breakeven prices have declined. Though, most shale companies are still not creating a profit. For the shale companies to be able to generate a profit they would have to work above breakeven points. Looking at history, shale drillers in the United States have historically loaded up on new debt which lets them continue to produce shale oil. However, many industry insiders now see that many of said companies are burning cash and not making a profit.

Especially smaller shale companies are in a bad state, since they need the most financing and are having the hardest time finding new sources of income. Smaller shale companies are unable to sit still and passively use their existing wells. The rapid decline in output requires that these companies engage in constant drilling, which is hard for smaller companies seeking capital.

Thus, as a result of this, smaller companies are under pressure to either grow their way out of the problem or finding a larger entity which can buy them out, which has been the case with several of these smaller oil companies. In general, what this could mean for the oil-market is a lower supply coming from the shale-producers.

US Oil Production

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Michael Poulsen

Senior Oil Risk Manager

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