Oil prices dependent on demand recovery

A pick-up in global economic activity post Covid-19 is the only pillar of support

by SHAZNI ONG / pic by BLOOMBERG

THE near-term price outlook for crude oil remains poor due to bearish demand-supply fundamentals with a pick-up in global economic activity being the only pillar of support.

The Covid-19 pandemic and resulting slowdown in economic activity is leading to a sharp fall in global demand, while the ongoing market share war between Saudi Arabia and Russia is leading energy prices lower in expectation of higher output levels by major producers.

Brent oil prices averaged US$53.50 (RM237.54) a barrel in the final week of February, but has plunged to US$25.84 a barrel at press time yesterday.

“The Covid-19 pandemic has the world economy staring at a recession, if not already in, by forcing many countries to impose lockdown which resulted in halted trading and movement of their people and businesses.

“This has caused the global air traffic to drop by 20% this year and oil demand to shrink by some 2.8 million barrels per day,” Putra Business School associate Prof Dr Ahmed Razman Abdul Latiff told The Malaysian Reserve (TMR) on Saturday.

Ahmed Razman added that the fall in crude oil prices is the worst since 2002 and is expected to linger for the next few months, as Covid19 has yet to show signs of abating and US oil producers have yet to control their own production of oil.

“I expect to see the oil prices to linger below US$30 per barrel until the end of this month when the situation of Covid-19 becomes more certain and whether the US, Saudi and Russian oil producers still decide to continue with high production of oil or finally restricting their output,” he said.

Saudi Arabia and Russia, as well other OPEC members are set to ramp up production in April, therefore, worsening the oil glut in the market as the producers seek to gain market share and preserve their national budgets.

This, Ahmed Razman said, could keep crude oil prices in the US$20 per barrel region in the short term.

“It will be a few months before we can start seeing oil prices hike upwards towards US$40 per barrel and beyond,” he said.

Asia School of Business assistant professor Dr Renato Lima de Oliveira concurs Ahmed Razman’s views and notes two near-term outlook based on the current development in the oil world.

In an optimistic scenario, the Covid-19 spread would rapidly decrease starting in May, and the global economy would escape a recession as factories return to full output, people travel again and economic activity recovers.

“Furthermore, OPEC+ agrees to a major production cut. Then, the price of a barrel can return to what it was in the beginning of the year, around US$60,” he told TMR on Sunday.

However, this optimistic scenario is getting harder to materialise, de Oliveira said.

The pessimistic outlook sees the Covid-19 crisis getting much worse before it gets better and the world falls into a recession with overproduction of oil, as OPEC+ cannot agree to cuts and each producing country wants to keep their market share.

“This will exacerbate even more the problems of a demand and supply shock, and can indeed bring prices to the single digits, at least temporarily,” he said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said there is a high chance that Brent crude oil prices could linger around US$35 per barrel for the year.

“Newsflow on US shale oil producers to cut spending and reduce supplies could help stabilise the oil prices. At this juncture, it’s quite difficult for crude oil prices to go beyond US$50 per barrel as weak demand and excess supplies could keep prices low,” he told TMR.

Sunway University Business School economist Prof Dr Yeah Kim Leng said crude oil price outlook is conditional on the willingness of the oil-exporting countries to agree on production cuts and ensure an orderly supply and inventory adjustment, as shale oil and gas fields are shuttered in the low price environment.

“The oil price outlook hinges on the global economy’s growth trajectory. There are positive signs that production activities in China are restarting. The stabilisation of demand in the world’s second-largest economy and major player in global supply chains will then help world oil prices to normalise at around US$40-US$50 a barrel.

“The oil price recovery, however, will also be contingent on the end of the oil price war between Saudi Arabia and Russia,” he told TMR on Sunday.