Investing.com - Oil prices treaded water before settling slightly higher on the first trading day of 2020 amid concerns that U.S. crude production could rebound strongly.
West Texas Intermediate, the U.S. crude benchmark, settled up 12 cents, or 0.2%, at $60.18 per barrel, after spending most of the day in negative territory. WTI ended the last trading day of 2019 down 1%.
Brent, the global oil benchmark, settled up 25 cents, or 0.4%, at $66.25. Brent also lost 1% on New Year’s Eve.
Tuesday’s declines barely made a dent on oil’s gains for last year. WTI rose 11% for December, its largest monthly gain since January. Brent settled up 7% for December, its largest monthly advance since April. For the year, the U.S. crude benchmark rose 34% while its global peer had a 24% gain, the biggest annual rise since 2016 for both.
Thursday’s weak intraday performance for crude followed worries that U.S. oil drillers who had been restrained in their activity all through 2019 could turn the spigots back on full force this year.
“The big uncertainty this year — and it is already beginning to be talked about — is can or will U.S. producers be able to continue to add as much extra volume as they have been for the last seven or eight years,” Chris Weafer, a senior partner at Macro-Advisory, told CNBC.
“This is a huge question,” Weafer added.
U.S. crude production hit a record high of 12.9 million barrels per day in 2019. Yet U.S. drillers cut the number of actively-operating oil rigs to 677 this year from 885 at the end of 2018, a 24% reduction.
Oil’s 2019 rally was largely helped by production cuts carried out by OPEC. Right from January the Saudi-led OPEC, joined by its ally Russia under the OPEC+ alliance, tried to enforce a daily production cut of 1.2 million barrels. As that arrangement was about to expire in December, OPEC+ said it would deepen the cuts to 2.1 million barrels per day from the start of 2020.
Despite its plan for stiffer reductions this year, OPEC+ could have a tougher time keeping oil prices up as U.S. shale oil output could rebound, traders said.
“The main reason for the 24% cutback in actively-drilling U.S. oil rigs this year was the price uncertainty that persisted midyear,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. WTI hovered between $50 and $55 during most of the summer months, weighing on the broader oil market.
Kilduff said with the OPEC decision to double down on production cuts taking effect only in early December, it will take U.S. drillers some time to regain their momentum.
“With oil prices being the way they are, one can bet on more challenges ahead for production,” Kilduff added. “WTI at above $60 is very, very remunerable to U.S. shale.”
Non-OPEC oil supply, led by the U.S. shale, is forecast to grow by 2.1 million barrels a day in 2020, according to the Paris-based International Energy Agency (IEA).
Global demand for oil, meanwhile, is set to increase by 1.2 million barrels a day next year, the IEA said.
That means the world will need 900,000 fewer barrels of oil every day from both OPEC and non-OPEC producers alike, a situation that could sharply offset OPEC+ production cuts.
Also, Russia’s crude oil and condensate output hit a post-Soviet high last year even as it curbed production under an agreement with OPEC, Bloomberg reported.
"The oil market continues to see robust crude oil production from the USA, Canada, and Brazil, which could lead to a supply glut in 2020," a recent report from Washington think tank Institute of International Finance said.
The report, written by a team led by Garbis Iradian, IIF chief economist for the Middle East and North Africa, forecasts world oil production to expand by 1.9 million barrels of oil a day in 2020 versus 2019. More than half that total will come from the United States.
While that increase in supply is a little less than 2% of the total, the oil market is always finely balanced, so seemingly small changes in supply or demand can have a significant impact on prices.