INSIGHT: Oil at $20 or $10 on the Horizon? ‘Price War Could Lead to Dumping’

SoDATA INSIGHT– Global demand for crude oil could drop significantly in 2020 — a record of 1.1 million barrels per day (bpd), as the coronavirus pandemic slams economic growth. Goldman Sachs has therefore slashed oil price forecast for second-quarter Brent crude oil by a third to $20 a barrel.

At that level Brent would be at its lowest since February 2002. Oil prices slipped again on Wednesday, with Brent trading near $28.50 a barrel. OPEC crude is at $31 a barrel.

According to Sachs, there will be a supply surplus of 3.9 million bpd and 5.7 million bpd in the first and second quarters respectively.

There’s enough global storage capacity to accommodate this surplus — about 1,100 million barrels (inclusive of the U.S. strategic reserve), but “the velocity of the upcoming inventory builds is now certain to overwhelm the ability to fill storage,” it added.

According to Andreas de Vries, a Strategy Consultant in the Oil & Gas industry, “in the Best-Case Scenario, the worst is yet to come for global crude oil demand. Ceteris paribus (all other things equal), the price of crude oil would continue to go down for at least another 2 to 3 months. $20 or even $10 per barrel is a real possibility”.

Energy analyst Rashid Hussain Syed says this could be coming. “Bloomberg yesterday termed Canada as the first casualty of the price war. Canadian crude is selling at around $8. It went down to almost $7 a barrel.

On the flip side, lower supply and a recovery in demand could bring the oil market into a deficit of 1.5 million bpd by the fourth quarter, said the bank. It has therefore kept its third- and fourth-quarter Brent price outlook unchanged at $30 a barrel and $40 a barrel respectively.

The oil price standoff between Russia and Saudi Arabia witnessed last earlier this month — with coronavirus in the air remains on the table.

Russia was unwilling to cut oil production further, Bloomberg reported — and it’s taking place against a backdrop of falling demand and plentiful supply.

“Both parties are adamant. Unless one blinks, situation to go from bad to worse,” Syed adds.

“The thing to watch who blinks first, Putin or MBS?”

According to him, at the moment, both seem ready for a long haul. “And this is not just price war. Demand destruction and the Corona pandemonium are weighing heavily on the markets. And mind it, these two variables are beyond the control of the two crude giants. The battle is on and for long”.

During the coming months even if the crude average dips to $20 and not $10, the average price drop would add breather to Pakistan’s fiscal debt scenario, says business consultant and analyst Irshad Salim. “Savings + deferred payments (it has in place with Saudi and UAE) could generate additional cash flow to address its markup payment (76pct of net revenue) or else the government could pass it through to consumers”.

“A hybrid could be looked in the given scenario as a way forward and strengthen the enduring stability and austerity mantra in the air. Having said that, the lower and middle-class need relief”.

Oil price war could witness dumping, and either or both could go in Pakistan’s benefit, Salim adds.

It is basically oil war leading to oil dumping, Syed adds.