Oil prices could plunge below $20 a barrel this quarter as demand craters: CNBC survey

KEY POINTS
  • Crude oil prices could plunge below $20 a barrel in the second quarter, according to nearly a third of respondents in a CNBC survey of 30 analysts, strategists and traders.
  • Some analysts believe crude oil prices could fall to as low as $10 a barrel as the coronavirus outbreak has severely dented demand.
  • Analysts are also skeptical that Saudi Arabia and Russia will agree to major cuts in supply.
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Oil storage tanks stand at the RN-Tuapsinsky refinery, operated by Rosneft Oil Co., in Tuapse, Russia, on Monday, March 23, 2020.
Andrey Rudakov | Bloomberg | Getty Images

The oil price bust may not be over.

A historic demand shock sparked by the coronavirus pandemic is set to worsen in the current quarter, undermining any coordinated effort by heavyweight producers Saudi ArabiaRussia and the United States to cut supply aggressively and rebalance the market, according to a CNBC survey of 30 strategists, analysts and traders.

Episodic spikes of $20 a barrel or more in benchmark crude oil futures of the type seen last week cannot be ruled out as rivals Saudi Arabia and Russia attempt to reverse a damaging battle for market share and engineer a global supply deal which could cut up to 15 million barrels a day, the equivalent of about 10% of global supply.

But such price rallies are unlikely to last, according to the findings of the CNBC survey conducted over the past two weeks.

Brent crude futures, the barometer for 70% of globally trade oil, are likely to average $20 a barrel in the current quarter, according to the median forecast of 30 strategists, analysts and traders who responded to a CNBC survey, or 12 out of 30 respondents.

However, nearly a third, or nine of those surveyed, said prices may drop below $20 a barrel this quarter.

Amongst the more pessimistic projections, ANZ’s Daniel Hynes saw the risk of prices in the ‘mid-teens’ while JBC Energy’s Johannes Benigni warned that both Brent and US crude futures could ‘temporarily’ fall to around $10 a barrel.

New normal

The Organization of Petroleum Exporting Countries (OPEC), the supplier of a third of the world’s oil, and its rivals outside the group are “of pretty limited relevance in this context, as they are neither likely to be willing nor able to stem the current demand shock,” Benigni said.

Bearish forecasters said two forces would keep oil prices depressed in the second quarter — skepticism that Saudi Arabia and Russia would relent in their price war and commit to the deepest cuts in the producer group’s history (with or without participation from U.S. shale producers) and a glut in the current quarter caused by a monumental collapse in global demand as the full economic severity of the global coronavirus pandemic unfolds.

“A demand drop of 10% is the New Normal with oil,” said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years.

Global commodities trader Trafigura’s chief economist Saad Rahim offered a starker prediction. Oil demand could fall by more than 30 million barrels a day in April, or around a third of the world’s daily oil consumption, Reuters reported on March 31, citing his forecasts.

And even if Saudi Arabia, its OPEC allies and major producers outside the group such as Russia and the U.S. did agree on aggressive supply restraint, it’s unlikely to materially drain global inventories that are closing in on what the oil industry calls ‘tank tops’, or storage capacity limits.

Too little, too late

“The long and short of it is that the current rally will likely be short lived,” Citigroup’s oil strategists led by Ed Morse said in an April 2 report.

“The big three oil producers may have found a way to work together to balance markets, but it looks like it is too little too late. That means prices would have to fall to the single digits to facilitate inventory fill and shut in production.”

Fatih Birol, executive director of the International Energy Agency said oil inventories would still rise by 15 million barrels a day in the second quarter even with output cuts of 10 million barrels a day, Reuters reported on April 3.

Citi expects Brent to average $17 a barrel in the current quarter and warned Moscow, Riyadh and Washington “cannot in the end stop prices from possibly falling below $10 before the end of April.”

Plus, travel restrictions, border closures, lockdowns and economic disruption caused by ‘social distancing’ and other measures taken by governments globally to slow the spread of the virus will exact a heavy toll on oil demand and could even linger when the virus clears, clouding the prospects of a recovery.

“As for the second quarter or even the third, I don’t see a V-shaped recovery for prices,” said Anthony Grisanti, founder and president of GRZ Energy, who has over 30 years of experience in the futures industry.

“The longer people are shut in the more likely behaviour will change…I have a hard time seeing oil above $30-35 a barrel over the next 6 months.”

Negative pricing

Standard Chartered oil analysts Paul Horsnell and Emily Ashford said they expect “an element of persistent demand loss that will continue after the virus has passed, driven by permanent changes in air travel behavior and the demand implications of businesses unable to recover from the initial shock.”

With demand at near-paralysis, oil and fuel tanks from Singapore to the Caribbean are close to brimming – stark evidence of the global glut.

Global oil storage is “rapidly filling – exceeding 70% and approaching operating max,” said Steve Puckett, executive chairman of TRI-ZEN International, an energy consultancy.

Citi’s oil analysis team and JBC Energy’s Johannes Benigni even warned of the risk of oil prices turning negative if benchmarks drop below zero, effectively meaning producers pay buyers to take the oil off their hands because they’ve run out of storage space.

“Theoretically, the unprecedented stock-build might mean negative oil prices in places, should the world or some regions run out of storage and if higher-cost production is stickier than thought,” Citi analysts said.

Despite the bearish consensus, nine survey respondents held a more constructive view. Within that group, six forecasters expected Brent crude prices to stabilize around the mid-to-late twenties in the second quarter while one called for $30 a barrel.

Tony Nash, founder and chief economist at analytics firm Complete Intelligence, and independent energy economist Anas Alhajji topped the range at $42- and $44 a barrel, respectively.

U.S. shale producers, who need $50 to $55 a barrel crude oil to just break-even, are struggling to maintain operations in a depressed price environment. That’s led to cutbacks in production and capital spending, job losses and bankruptcies across the U.S. shale industry and globally.

The oil market is underestimating such a shake out and its future impact on rebalancing the global oversupply, Alhajji said.

“Shut-ins are already taking place. Companies made major spending cuts and many will cut again.”

Markets are also downplaying the extent of the post-virus rebound on oil demand, Alhajji and Nash claimed, though determining the endpoint to the pandemic is near-impossible.

“We expect initial excitement over demand in May as the West comes back online, then it falls slightly as expectations are moderated going into June,” Complete Intelligence’s Nash said.

Oil drops on concerns that US-China trade deal may not stoke demand

CNBC

Reuters
KEY POINTS
  • Oil prices slipped on Wednesday on concerns that the pending Phase 1 trade deal between the United States and China, the world’s biggest oil users, may not boost demand.
  • Brent crude was down 19 cents, or 0.3%, at $64.30 per barrel by 0428 GMT.
  • U.S. West Texas Intermediate crude futures were down 19 cents, or 0.3%, at $58.04 a barrel.
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A policeman is seen at West Qurna-1 oil field, which is operated by ExxonMobil, in Basra, Iraq January 9, 2020.
Essam al-Sudani | Reuters

Oil prices slipped on Wednesday on concerns that the pending Phase 1 trade deal between the United States and China, the world’s biggest oil users, may not boost demand as the U.S. intends to keep tariffs on Chinese goods until a second phase.

U.S. Treasury Secretary Steven Mnuchin said late on Tuesday that tariffs on Chinese goods will remain in place until the completion of a second phase of a U.S.-China trade agreement, even as both sides are expected to sign an interim deal later on Wednesday.

Brent crude was down 19 cents, or 0.3%, at $64.30 per barrel by 0428 GMT. U.S. West Texas Intermediate crude futures were down 19 cents, or 0.3%, at $58.04 a barrel.

“A pickup with global demand for crude may struggle as U.S.-Chinese tensions linger after some hardline stances from the Trump administration,” said Edward Moya, analyst at brokerage OANDA.

“Financial markets are disappointed that the Trump administration … signalled tariffs will remain in place until after the 2020 U.S. Presidential election, depending on whether China comes through on their promises with the phase-one agreement.”

U.S. President Donald Trump is slated to sign the Phase 1 agreement with Chinese Vice Premier Liu He at the White House on Wednesday. That agreement is expected to include provisions for China to buy up to $50 billion more in U.S. energy supplies.

Adding to worries over U.S.-China trade relations, the U.S. government is nearing publication of a rule that would vastly expand its powers to block shipments of foreign-made goods to Chinese technology giant Huawei, according to two sources.

Meanwhile, U.S. crude inventories rose by 1.1 million barrels, data from the American Petroleum Institute showed, countering expectations for a draw.

U.S. oil production is expected to rise to a record of 13.30 million barrels per day in 2020, mainly driven by higher output in the Permian region of Texas and New Mexico, the U.S. Energy Information Administration (EIA) said.

Oil steady on easing US-Iran tensions, eyes on China trade deal

CNBC

Reuters
KEY POINTS
  • Brent crude was down 2 cents at $64.96 per barrel at 0438 GMT, while West Texas Intermediate (WTI) was up 3 cents at $59.07 a barrel from the previous session.
  • Oil prices had surged after the killing of an Iranian commander by a U.S. drone strike and the launch of Iranian missiles in retaliation, but then slumped as the United States and Iran stepped back from the brink of direct conflict.
  • Meanwhile, expectations of thawing trade tensions between the United States and China, the world’s two biggest oil consumers, have offered support for prices.
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A damaged installation in Saudi Arabia’s Abqaiq oil processing plant is pictured on September 20, 2019.
Fayez Nureldine | AFP | Getty Images

Oil prices held steady on Monday as fears of conflict between the United States and Iran eased, with investors shifting their focus to this week’s scheduled signing of an initial U.S.-China trade deal, which could boost economic growth and demand.

Brent crude was down 2 cents at $64.96 per barrel at 0438 GMT, while West Texas Intermediate (WTI) was up 3 cents at $59.07 a barrel from the previous session.

Oil prices surged to their highest in almost four months after a U.S. drone strike killed an Iranian commander and Iran retaliated with missiles launched against U.S. bases in Iraq, but slumped again as Washington and Tehran retreated from the brink of direct conflict.

Global benchmark Brent touched $71.75 per barrel last week before ending on Friday below $65.

“The possibility of the war between the United States and Iran has disappeared … For the week, the signing of the U.S.-China trade deal would lift oil prices on expectations for higher demand,” said Kim Kwang-rae, a commodities analyst at Samsung Futures in Seoul.

Backwardation in Brent, a market structure where prices for near-term contracts are higher than those for later contracts, is currently at 72 cents per barrel, from 84 cent a week earlier, whereas the WTI backwardation is at 4 cents a barrel from 23 cents last week.

Backwardation tends to reflect tightening supplies, and the narrowing of the values indicate that worries over supply disruption are receding.

“The fundamentals for WTI remain weak for the coming months and stocks are expected to build at Cushing,” said Virendra Chauhan, an oil analyst at Energy Aspects in Singapore.

“For Brent, which is a broader indicator of the global crude market, it is a combination of supply and demand,” he added.

“Sentiment appears to have turned a corner on the trade-war front, while some green shoots regarding industrial activity and the start of fiscal stimulus, could mean demand surprised to the upside.”

A U.S.-China trade deal is due to be signed in Washington on Wednesday.

Oil tumbles as investors rethink Mideast disruption risk

Reuters

SINGAPORE (Reuters) – Oil prices on Tuesday surrendered some gains made over the previous two days as investors reconsidered the likelihood of Middle East supply disruptions in the wake of the United States killing a top Iranian military commander.

Brent crude LCOc1 fell as much as 1.5% to $67.86 a barrel and was at $68.39, down 52 cents, at 0737 GMT. U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $62.85, down 42 cents, after earlier dropping 1.5% to an intra-day low of $62.30.

Prices surged during the previous two sessions, with Brent reaching its highest since September while WTI rose to the most since April. The gains followed fears of escalating conflict and potential Middle East supply disruptions after the Jan. 3 drone strike in Baghdad that killed Iran’s Qassem Soleimani. But, some analysts have tempered expectations for a widespread conflict.

“The market’s clearly worried about the potential for supply disruption but there’s no obvious path forward from here,” said Lachlan Shaw, head of commodity research at National Australia Bank.

“It’s all a matter of scenarios that may impact oil production or not, so the market seems to have recalibrated in the last 24 to 36 hours on some of those likelihoods.”

He added that Iran will need foreign currency earnings from continued oil exports and it will be counter to their interest if they try to block the Straits of Hormuz. Roughly 20% of the world’s oil passes the Middle East waterway, which borders Iran.

Consultancy Eurasia Group said Iran is likely to focus more narrowly on U.S. military targets instead of energy targets.

“That’s not to say it won’t continue low-level harassment of commercial shipping or regional energy infrastructure but these activities will not be severe,” it added.

Prices fell despite higher compliance among the Organization of the Petroleum Exporting Countries (OPEC) on meeting production quota curbs aimed at reducing supply.

OPEC members pumped 29.50 million barrels per day (bpd) last month, down 50,000 bpd from November’s revised figure, according to a Reuters survey published on Monday.

“We still believe in the absence of retaliation or disruptions, that oil prices will trend lower over the course of 1Q20, with the market remaining well supplied over the first half of 2020,” ING analysts said in a note.

U.S. crude oil stockpiles likely dropped last week for a fourth week in a row as exports ramped up although refined products stocks were expected to rise, a Reuters poll showed on Monday.

Six analysts estimated, on average, that crude stocks fell by 4.1 million barrels in the week to Jan 3.

Even before Soleimani’s death, investors were increasing their bullish WTI holdings, with money managers raising their net-long positions in the week to Dec. 31, the Commodity Futures Trading Commission said on Monday.

Reporting by Florence Tan; Editing by Kenneth Maxwell and Christian Schmollinger

Oil steady amid optimism U.S.-China close to signing trade deal

CNBC

Reuters
KEY POINTS
  • Oil prices were mostly steady on Monday after three weeks of gains.
  • U.S. drillers may be anticipating higher prices as well and last week increased the number of their oil rigs by the most in a week since February 2018.
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A general view of the Novokuibyshev Refinery owned by Rosneft oil company on March 15, 2012 in Novokuibyshevsk, Samara region, Russia.
Sasha Mordovets | Getty Images

Oil prices were mostly steady on Monday after three weeks of gains amid optimism the United States and China were close to signing a trade deal to end a tariff war, with President Donald Trump saying an agreement would be signed “very shortly.”

Brent crude was down 4 cents at $66.10 a barrel by 0100 GMT. West Texas Intermediate was also down 4 cents at $60.40 a barrel.

A so-called phase one deal was announced earlier in December as part of a bid to end the months-long tit-for-tat trade war between the world’s two largest economies, which has sent shockwaves through markets and roiled global growth.

The United States is to agree to reduce some tariffs in return for a big increase in purchases by Chinese importers of American farm products, according to the deal that is due to be signed in January.

“We just achieved a breakthrough on the trade deal and we will be signing it very shortly,” Trump said at a Turning Point USA event in Florida on Saturday.

The easing of tensions has improved business confidence and boosted the outlook for economic growth and energy demand.

“Oil prices will continue to benefit from the positive developments in the U.S.-China trade,” said Stephen Innes, chief Asia market strategist at AxiTrader.

“With a more constructive global macro outlook than at any time in the last year, oil is well-supported by both fundamental factors and sentiment now,” he said.

U.S. drillers may be anticipating higher prices as well and last week increased the number of their oil rigs by the most in a week since February 2018.

Drillers added 18 oil rigs in the week to Dec. 20, bringing the total to 685, the most since November, Baker Hughes, an energy services company, said in its weekly report.

U.S. economic growth nudged up in the third quarter, latest data shows, and the economy appears to have maintained the moderate pace of expansion as the year ended, supported by a strong labor market.