BAKU, Azerbaijan, April 24
By Leman Zeynalova - Trend:
Oil prices are projected to average $35/bbl in 2020 before recovering to $42/bbl in 2021, which is substantially lower than the October forecast of $58/bbl and $59/bbl, Trend reports referring to the World Bank’s (WB) outlook.
From their current lows, oil prices are expected to gradually recover in 2020 before strengthening into next year, according to the WB.
“The expected recovery is forecast to be the weakest in history following a major collapse in oil prices (i.e., compared with 2008, 1998, and 1986). In past declines, prices rebounded from their troughs by around 50 percent within about five months, and approximately doubled after 12 months. In all previous cases, significant OPEC production cuts—sometimes delayed—contributed to the price recovery. The sharp downward revision to the forecast reflects the weakness in oil demand, which dominates any supply response, particularly in the short-term. Prices are expected to rise in 2021 as mitigation measures lessen and demand gradually recovers, albeit to a lower level than previously expected. The substantial oil inventory overhang will likely cap any significant price increases over the year,” reads the report.
Risks to the price forecast are skewed to the downside, the WB believes.
The greatest risk is a slower end to the pandemic, particularly if mitigation measures remain in place for longer than expected, which could cause oil demand to be even weaker than anticipated, according to the report.
“A more prolonged or deeper global recession would also result in weaker oil demand. The scale and speed of the drop in demand is such that global inventories will likely fill rapidly, even with a sharp fall in output among OPEC and non-OPEC producers. For example, in the United States oil inventories increased at their fastest pace on record in the first two weeks of April. The International Energy Agency estimates that global inventories could rise by almost one-third through 2020Q2 and reach full capacity by June. If demand hasn’t at least partially recovered by then, involuntary production cuts will likely be even steeper,” said the World Bank.
Brent crude oil prices could drop to single digits during 2020Q2 as inventories are overwhelmed, a phenomenon already observed for some price benchmarks, according to the report.
“Finally, the production cuts announced by OPEC+ could prove to be smaller. During past rounds of production agreements some countries exceeded their production quotas. The scale of cuts required this time—several times larger than in previous episodes—could prove even more difficult to achieve, increasing the probability of non-compliance. An eventual breakdown of the agreement is a distinct possibility,” said the Bank.
Upside risks primarily relate to production and are more likely to affect the outlook in 2021, says the report.
“Substantially weaker investment in new production, or greater shutdown of production this year could reduce future production capacity. Should demand recover more quickly next year, it could result in a sharper bounce-back in prices in 2021. OPEC+ could also agree to deepen their production cuts, which would provide some support to prices in the second half of 2020 and into 2021,” said the WB.
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