Grading My 2020 Energy Predictions

At the beginning of each year, I make several predictions about the energy sector. You can see those predictions and read the context at Energy Sector Predictions For 2020.

There is still a little over a week left in 2020, but I believe there is enough available information to gauge the accuracy of these predictions.

As always, I provided predictions that are specific and measurable. Following each prediction, I discuss what actually happened in 2020, and conclude whether the prediction was right or wrong.

1. For the first time since 2014, the closing price of WTI will not drop below $50/bbl

This was undoubtedly the fastest a prediction of mine has ever failed. The year started off on a reasonably bullish footing for oil. Many analysts were projecting a shortfall in oil production for the year, and OPEC had been pretty aggressive in keeping oil prices propped up.

But scarcely a month after I made the prediction, two factors combined that completely upend the oil markets. The first was that the spreading Covid-19 pandemic in China caused oil prices to weaken on concerns about a slowdown to the Chinese economy. As a result, OPEC members met with Russia with the hope of announcing additional production cuts that might stabilize oil’s free fall. Russia refused, and that sent oil prices into a nosedive.

As the Covid-19 pandemic gained a foothold in the U.S., oil demand plummeted. Crude oil futures fell into negative territory for the first time ever. As a result, my prediction was nearly 180 degrees wrong: Oil prices hardly spent any time above $50/bbl in 2020.

2. U.S. oil production growth will fall below 1.0 million BPD

Covid-19 had a big impact here as well. For all of 2019, U.S. oil production averaged 12.2 million barrels per day (BPD). I expected growth to slow in 2020, but it did more than slow. Due to the impact of the Covid-19 pandemic on oil demand, U.S. oil production actually declined in 2020.

The numbers won’t be finalized until early 2021, but it looks like the production numbers for 2020 will be around 11.5 million BPD. That would represent a annual decline of nearly 6%.

3. The average natural gas price will be at the lowest level in more than 20 years.

The lowest natural gas price since 1999 took place in 2016, when natural gas prices averaged $2.52/MMBtu for the year. My prediction was that the 2020 average price would be lower than this.

Again, numbers won’t be finalized until the year ends, but through December 15th the average price for 2020 was $2.00/MMBtu. Thus, this prediction is going to end up being correct.

Natural gas prices have shown some strength as we head into the end of the year. Although the average for the year has been $2.00, the average over the past couple of months has been close to $3.00. That’s a function of colder weather, but it is also well above the price it was as we entered winter in 2019.

4. On average, the U.S. will be a net exporter of crude oil plus finished products for the first time

The Energy Information Administration (EIA) presently only has data on this category tabulated through September, but in seven of nine months this year the U.S. was a net exporter of crude oil plus finished products. Through September, the U.S. had recorded average net exports of 605,000 BPD. Based on the trends headed into September, this prediction will almost certainly end up being correct.

5. ConocoPhillips will have a total return of at least 20%

This prediction was tied to oil prices, and the collapse in oil prices collapsed valuations in the oil sector. Thus, despite ConocoPhillips entering 2020 in excellent shape, there was no way it could withstand the collapse in oil prices.

At one point in March, ConocoPhillips had fallen by 65% from the first of the year. Shares have since rallied, but are still down 37% on the year.

As I noted when I made these predictions, I considered this year to be especially challenging to read because there were so many important variables in motion. The black swan event of the worst pandemic in a century played havoc with my ability to read the tea leaves.

Nevertheless, I got three of five correct in an especially challenging year. It wasn’t my best year, but given the circumstances it could have been worse.

In early January I will once again attempt to read those tea leaves for 2021.

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