The coronavirus pandemic has deepened the oil crisis, which was facing problems with an abundance of supply and a disagreement over capping of supply between the OPEC +countries. Oil prices recently turned negative, and it seems the downslide in the oil saga may not end soon.
Global consumption oil has come down by nearly 30 percent and storage capacities the world over are overflowing, pushing the prices in negative territory. OPEC+ countries, which include Russia, agreed to cut roughly 15% of global supplies. The plan included gradual cuts of about 5 million bpd from producers outside the OPEC+ group. But the decrease did not match the expected cutback by the market and oil prices showed no recovery from the slide.
So is there a silver lining in these dark clouds? Oil industry experts are of the opinion that not all is lost, and the catastrophic oil price slide may be a short-term phenomenon.
According to them, the oil industry is used to such boom and bust cyclical events. When prices go down, there is generally a scramble to buy oil by developing and economically weak countries, which then pushes the prices up.
Negative Oil Prices A One-Off Event?
Moreover, the negative oil prices for American West Texas Intermediate (WTI) oil futures are considered a one-off event. The prices are recovering slowly, the WTI is trading above $ 19 per barrel, while Brent hovers at $25.23. Oil prices are sure to recover in the coming year.
The pandemic has surely thrown a spanner in the recovery mode. But they insist that this will not have a long-term consequence. Now, all depends on how soon the lockdown is eased in all countries and the economies limp back to normalcy. Additionally, the discovery of effective medications and vaccinations is sure to affect the bourses too.
Chief Investment Officer of UBS, a Swedish investment and financial advisory company, Mark Haefele, said recently, “While the oil market is heavily oversupplied this quarter, we expect it to move toward balance next quarter and become under-supplied in 4Q this year as lockdown restrictions are eased and oil demand picks up.”
Steep, Sudden Drop in Oil Demand to Continue
Industry insiders see a short and mid-term lack in demand due to restrictions on travel and a fall in spending and consumer demand, which will affect the automobile sales and the transport industry. But experts are confident that the fourth quarter of the year will see a recovery with maybe prices being pushed back to a decent level due to undersupply of crude oil. Hefele says that Brent prices could rise 110 percent from current levels, reaching $43 by the end of the year.
Even OPEC and the IEA see a recovery in Brent prices to the $40 per barrel level. OPEC President and Minister of Energy of Algeria Mohamed Arkab believes that China’s recovery may push the prices. It is unlikely that oil prices will ever go back to the $80 to $100 level. The recovery will be on the more realistic levels, as cited above.
For the US shale oil-producing industry, this is not good news as they operate on very low margins and prices at $35 to $40 per barrel are not viable for them. Most may be forced to shut down or will be swallowed up by the bigger energy companies, which have the capacity to ride out the price storm.
Another viewpoint is that the industry will restructure and re-organize with the weaker elements being weeded out, and creative destruction of the sector will throw up a more resilient industry.
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