Some analysts see the world dodging a recession next year, which provides some
upward room for oil prices.
The IEA warned last week that "the hefty supply cushion"
building up in the first half of 2020 will cause OPEC+ problems as the group tries to balance the oil
market. Part of the reason for another potential surplus is the steep drop in
demand growth this year, forcing oil forecasters to make multiple downward
revisions to their projections.
"With consumption growth of just 830 thousand b/d YoY in 2019, global oil
demand has easily expanded at the lowest rate since the global financial crisis
10 years ago," Bank of America Merrill Lynch said in a note.
The slowdown was particularly concentrated in industrial sectors, which have
been hit hard by the trade war. "The manufacturing downturn in 2019 has
been so pronounced that we think it could aptly be labeled as the third global
industrial recession in the past 10 years, following the activity drops
witnessed in 2012 and 2016," the bank said.
Or, put more succinctly, "The world has just lived through an industrial
recession," Bank of America concluded, and oil prices really only held up
because of massive supply outages in 2019. The industrial slowdown spread
around the world.
Take India, for example. The "weak picture for the manufacturing and
industrial" sectors of the Indian economy continue, JBC Energy said in a
note on Monday, which have hit diesel sales. "The 120,000 b/d (7%) y-o-y
contraction was greater than even the demonetization-driven downside from
January 2017," JBC Energy said. "With bitumen sales also low, it
appears activity in Indian manufacturing and construction is waning."
But there are some reasons to think that things could turn around. While a lot
still depends on the outcome of the U.S.-China trade war and the "partial
deal" that the market still believes is likely, recent streams of data
have tamped down fears of a recession. "Looking into 2020, we expect an
improvement in cyclical demand conditions as manufacturing PMIs seem to have
stabilized and in some cases appear to be turning positive," Bank of
Part of the reason for more optimism is that corporations with global supply
chains have held back on purchases over the past year, in large part because of
the trade war, and have whittled away at inventory.
The strategy seemed to be an attempt to wait out tariffs in the hopes of a
negotiated breakthrough. That makes sense at the individual company level, but
it hit manufacturers hard as sales and activity dropped. However, companies
will now have to restock in 2020, Bank of America says. That could help steady
Meanwhile, if the U.S. and China can indeed agree to a partial trade deal, that
would "further help boost industrial activity and confidence in the global
economy," Bank of America said, and "any signs of improvement on the
trade front could add upward pressure to cyclical energy and metals
prices." The removal of some tariffs could both push down the dollar and
raise commodity prices.
Still, a comprehensive breakthrough in the trade war is going to be extremely
difficult, and the two sides have been far apart on the big issues. The partial
deal, such as it is, would only suspend tariffs in exchange for China buying
large sums of agricultural goods.
But even the partial deal has run into trouble. The Trump administration has
hyped a $50 billion purchase from China for U.S. agricultural goods, a figure
that some say is "not possible." So, it's worth noting
that even a very narrow and modest agreement has become a challenging prospect,
to say nothing of more structural differences between the two countries.
In short, while the tone has softened and both sides have signaled that
negotiations are proceeding to a conclusion, the U.S.-China trade war is far
In fact, right on cue, doubts began to resurface on Monday. CNBC said that the "mood in Beijing about a trade deal is
pessimistic due to U.S. President Donald Trump's reluctance to roll back
tariffs." Beijing may instead decide to sit and wait, betting that Trump's
standing continues to deteriorate in the face of an impeachment inquiry.
"It looks like this is by no means a done deal," Matthew Miskin, a