Brent rose 2% to USD64/bbl after OPEC and its allies unveiled a production cut of 2.1 million barrels per day (mbpd) to prevent a supply glut emerging and support prices. The group of oil exporting nations also appeared unified, which could be seen as increasing the chances that members will adhere to lower production as agreed. OPEC+ will steepen its production cuts during 1Q20 from 1.2mbpd to 1.7mbpd. With Saudi Arabia institutionalizing its previous extra cut —its energy minister said the kingdom will cut a further 400kbpd from its production cap—the group indicated that total cuts will increase to 2.1mbpd from 1.2mbpd versus the October 2018 baseline.

But we are skeptical that OPEC will succeed in supporting prices for three main reasons:

Hence, we expect Brent to trade at around USD55/bbl by the middle of 2020, only recovering to USD60 by the end of next year. For investors looking to the year ahead, we expect gold to outperform more cyclical commodities. We see gold appreciating in 2020, albeit at a slower pace than in 2019, when it was up 18% in the year to October. Muted economic growth and now lower interest rates reduce the opportunity cost of holding gold, which does not offer a yield. Political uncertainty could send safe-haven flows into gold. And since gold is priced in USD, a weaker dollar would in turn push gold prices higher. For more details, see our Year Ahead 2020 publication.