Crude oil will not move southward for ever

G Chandrashekhar | Updated on March 11, 2020

Consumers must take advantage of the current low prices, but be ready for a rebound of the energy market   -  Getty Images

The recent precipitous fall in energy prices has prompted many analysts to forecast even lower prices, with some talking about Brent going down to $20 a barrel. But from experience, one should know that it would be foolhardy to get carried away by wild price movements and speculative bets. Forecast of $2,000 a troy ounce for gold is another case in point.

Without doubt, the oil market is and will continue to remain volatile for sometime, possibly into the second quarter. But, from its recent lows, crude oil has already started to recover, with Brent testing $40 a barrel on Tuesday, unable of course to hold on to the gains.

Demand-supply factor

Both demand side and supply side factors are at work. Slowing economic activity, including export-import trade, as also travel and tourism because of the spread of coronavirus (Covid-19) is set to impact global growth in 2020. Given the relationship between economic growth and energy demand, crude oil consumption growth is set to fall as predicted by the International Energy Agency.

From the supply side, the breakdown of talks among OPEC+ has sent out strong signals that major producers are set to increase their supplies, particularly at a time when demand growth has all but dried up. Both Saudi Arabia and Russia have made their intentions clear – retain market share at any cost. So, it is less of a price war and more of an all-out effort to retain market share.

The market is looking at a surplus situation, which has pushed the energy market down, for the second quarter. Yet, other supply side issues are coming to the fore. High-cost producers will be forced out of the market. The price collapse has left the US shale oil producers in the lurch. Falling rig count is sure to fall further. Many producers are now cutting back on their investment, which, in turn, will stress shale oil production growth.

Strategic reserves

Meanwhile, countries are beginning to build strategic reserves of oil available at bargain prices. This will also be a supporting factor for the market grappling with a bear hug.

While energy demand certainly remains a concern in the months ahead, looming developments on the supply side cannot be ignored. As pointed out in these columns earlier (BL Commentary March 9), the last word on OPEC+ talks has not been said as yet and that the ongoing price war has no winners among producers.

There are already signs of Russia beginning to soften its position because the country can ill-afford an economic slump resulting from oil price slump. Despite stiffening its stand, Saudi Arabia, in its own self-interest, is sure to attempt to bring OPEC+ for another round of talks to decide on further output cuts.

Oil may rebound

As they say, oil is 90 per cent politics and 10 per cent economics; and again as they say, in politics a week is a long time. Producers will deploy every trick in the book to prop the market up. Consumers must take advantage of the current low prices, but be ready for a rebound of the energy market.

Brent, for instance, is unlikely to recover to its earlier levels of above $60 a barrel anytime soon. At the same time, it is unlikely to stay at the low to mid-30s for long.

The writer is a policy commentator and commodities market specialist. Views are personal

Published on March 11, 2020

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