Oil could slip below $20 as US piles pressure to end price war

he Transneft Ust Luga in St Petersburg. Despite the oil price crash, Russia refuses to budge as it claims it can withstand lower prices for a decade.

As the US intensifies pressure on leading oil producers to change their supply strategy to stop the ravaging price war, market analysts predict a colossal hit to demand already inflicted by Covid-19 would continue to send prices steeply down to below $20 per barrel in the second quarter.

Market pundits predict that assuming strong US oil market engagement, the phenomenal demand destruction foreseen in the second quarter would be irrevocable.

Analysts at MUFG, Japan's largest bank, said even under the scenario of a US involvement in oil market, any consequent supply cuts would remain too negligible to offset the unprecedented damage caused by the epidemic, "which we expect to bring down global demand by at least 8.5 million barrels per day at its peak in April, leading to a price of below $25 per barrel, with markets potentially sporadically testing cash-costs levels below $20 a barrel".

As per MUFG calculations, Brent price levels will be in the range of $28.60 in the first quarter of 2020, $32.30 in the second, $35.60 in the third and $46.10 in the fourth.

"Specifically in the second quarter, we do not rule out a protracted period of oil prices at operational pressure levels of below $25, with markets potentially sporadically testing cash-costs levels below $20," analysts at MFUG said.

Mike Pompeo, the US secretary of state, made an appeal to Saudi Arabia to help stabilise the market ahead of a meeting of G20 leaders on Thursday, marking Washington's most direct appeal yet in a confrontation that has exacerbated a collapse in oil prices triggered by the global coronavirus pandemic.

A senior state department official last week said multiple oil companies and members of the US Congress had lobbied the Trump administration to intervene. The official said excess oil output only "exacerbates" existing challenges as authorities scramble to respond to the pandemic

"The secretary stressed that, as a leader of the G20 and an important energy leader, Saudi Arabia has a real opportunity to rise to the occasion and reassure global energy and financial markets when the world faces serious economic uncertainty," the state department said in a statement.

Analysts said the raging price war has helped to cut oil prices in half this month to near $25 a barrel, the lowest level in 17 years. Saudi Arabia launched the offensive at the beginning of the month after Russia refused to join Opec in making deeper cuts to crude production to support prices. In response, the kingdom has said it will open the taps to demonstrate its power in the market. But the decision was made before it became clear how badly coronavirus would hit global demand, raising hopes Saudi Arabia can be convinced to alter its stance - even as it remains at odds with Russia over how to respond to the crisis.

Despite the price crash, Russia refuses to budge as it claims it can withstand lower oil prices for as long as a decade. But the timing of this price war looks "really horrible" for its economy, which needs about a trillion rubles, or roughly $12.7 billion a month over the next few months to emerge stable from the coronavirus pandemic and the oil price crash, analysts said.

As per forecast by most experts, the price war sparked plunge in demand, estimated at being between 10 per cent and 25 per cent of the 100 million barrel a day global market, had far exceeded their projections in early March, before the start of widespread lockdowns and flight cancellations.

The global oil industry is now facing the prospect of running out of storage in a matter of weeks as the most severe demand slump in history coincides with rising supplies. Similarly, a large number of US shale producers are facing bankruptcy and production is expected to fall sharply in the next 18 months if prices remain low,

Analysts at Bank of America warned on Wednesday that an Opec+ supply surge and crumbling oil demand had raised concerns about a surplus that could overwhelm global storage. "In our base case, inventories would rise by an almost unprecedented 4 million b/d in (the second quarter), but this number could be as high as 10 million b/d in a severe surplus," analysts at Bank of America said in a research note.

Following the oil price crash from earlier this month, Russia's Finance Ministry said Moscow had enough resources to cover budget shortfalls amid oil prices that are between $25 and $30 a barrel for six to ten years

Analysts said since Russia's debt load is much smaller than that of other economies, indeed among the lowest in the world, at 19.48 per cent, recovery should be relatively smooth. "At current oil prices, the Russian economy will tip into a deficit, although a moderate one, at 0.9 per cent. Under such scenario, we do not expect any immediate change of stance or softening by Moscow to prop up the market," analysts said.

- issacjohn@khaleejtimes.com

Issac John

issacjohn@khaleejtimes.com