BAKU, Azerbaijan, June 9
By Leman Zeynalova – Trend:
OPEC+ may face difficulties in reaching consensus when the worst of the COVID-19 crisis is over, Trend reports citing Fitch Ratings.
At the same time, Rystad Energy says that an OPEC+ deal to continue output curtailments never meant that prices will always increase.
“Healthy price levels can bring unrestricted production back from other countries, such as the US and Canada, where producers were forced to shut-in wells amid the crisis. And if production rises there, prices will of course take a hit. In fact the US has already started bringing back part of its shut output. All eyes will be on how Covid-19 develops from now on and if all other supply variables remain stable, prices will move in a direct opposite relation to new confirmed cases,” said the company.
Rystad Energy points out that oil climbed faster than most expected to around 40 USD, but the ascent is steeper and more difficult now and how Covid-19 affects demand works for prices as an ‘altitude sickness’.
Rystad Energy expects prices to continue fluctuating around the 40-dollar mark for the remainder of the month and until we have a more definite idea of how Covid-19 and US production develop. And of course of how much OPEC+ complies with its commitment.
World Bank believes that overall, oil prices are expected to average $32 per barrel in 2020 and $38 per barrel in 2021—$26 and $21 per barrel below January forecasts, respectively.
“Oil demand is expected to fall by about 20 percent in the year to the second quarter of 2020 and an unprecedented decline of 9 percent is projected for the year as a whole. Such a decline would be unprecedented, surpassing the previous record fall of 4 percent in 1980,” said the World Bank.
Nevertheless, according to Fitch Ratings, the OPEC+ agreement to extend by one month record oil production cuts should accelerate market rebalancing, Fitch Ratings says.
“This is further supported by a commitment to improve compliance from those countries that were unable to reach full conformity with the cuts. The OPEC+ countries have made radical production cuts in the stress scenario, but it may be more difficult to reach a consensus when the worst of the crisis is over. And it is unclear whether the recovery in oil prices to date is sustainable. Furthermore, demand and production in non-OPEC+ countries, notably the US, will continue to have a significant impact on the supply/demand balance and prices,” said the agency.
Fitch Ratings believes that a normalisation of oil inventory built up in 1H20 will take at least several months.
“Crude oil prices rose significantly in May and continued to improve in early June, because the surplus has been reduced materially. A price differential between the physical and financial markets has disappeared, pointing to crude oil market tightening. We believe that a stress case scenario with prices falling significantly below USD30/bbl is now less likely. The market is likely to experience a production deficit in 2H20 due to gradually improving demand and reduced supply,” said the rating agency.
“Demand recovery is now key in achieving balance in the oil market. It could be undermined in the event of a second coronavirus wave and the re-introduction of lockdowns, although it is not our base case. While consumption of gasoline and diesel could recover by the year-end, jet fuel may lag behind as international travel restrictions may remain in place and demand for business travel may be structurally impaired. “
---
Follow the author on Twitter: @Lyaman_Zeyn