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    Crude price marks recovery after historic lows in April, but will it sustain?

    Crude price marks recovery after historic lows in April, but will it sustain?

    Crude price marks recovery after historic lows in April, but will it sustain?
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    By Manisha Gupta   IST (Updated)

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    The crude oil market fundamentals and sentiments have shifted significantly over the last three months. There is now an improved outlook with the crude oil prices trading at three-month highs, back to near pre-COVID-19 levels.

    The crude oil market fundamentals and sentiments have shifted significantly over the last three months. There is now an improved outlook with the crude oil prices trading at three-month highs, back to near pre-COVID-19 levels.
    Brent crude hit lows of $16 a barrel in April; it has seen stable recovery since and has managed to hold $40 in past couple of weeks. The US crude went in the negative territory in April, but is holding above $40 currently.
    For the first time in many months the crude prices have managed to find a range. The physical market is recovering and there is some stability. But will the prices sustain at current levels? This is turning out to be the most volatile year in history as changes in price, demand and dynamics worthy of a decade have happened in the first half of 2020.
    Banks advice clients to go long
    The Bank of America Merril Lynch in its latest report has lifted price view for 2020 for Brent to $43 a barrel and to $50 for 2021. BoAML also raised WTI crude outlook for 2020 to $39.7. According to a JP Morgan report, the oil market could swing into a deficit sometime in 2022.
    Forecasts
    • BoAML: Brent $43.70, WTI at $39.7
    • Goldman Sachs: Brent to average $40.40, US crude at $36
    • Morgan Stanley: Brent at $40
    • Wood Mackenzie: Brent $45 a barrel
    • IEA: Brent to average $38.02, US crude to average $35.14
    • HSBC: Brent at $39 a barrel, US crude at $34.6
    • Barclays: Brent at $37, US crude at $33
    • Demand recovery
      • The first wave of strength in crude oil is led by China, followed by Europe and then North America.
      • China demand is estimated to be back at 90 percent of the pre-coronavirus level before the demand crashed.
      • Vitol estimates that global oil demand is rising by about 1.4 mln bpd every week in June.
      • Global demand fell near 30 percent in March-April when many countries went into lockdown. The consumption currently is expected 10-15 percent below normal.
      • Supply curbs
        The crude oil market is stabilizing amid supply curbs from the Organization of the Petroleum Exporting Countries (OPEC) and its allies. The agreement is to cut 9.7 mln barrels until July-end and then taper to 7.7 mln barrels per day for rest of 2020. The US, Canada oil and gas rig counts at record lows.
        Continued reopening of economies around the world would lead to aviation and transportation demand recovery.
        Will the prices sustain?
        There are signs that the rally may have hit a ceiling. The coronavirus infections are still rising around the world. And that could be the single biggest reason for a stall in price recovery. The more the virus spreads, the longer it will take for the oil demand to recover. Jet fuel demand could suffer more sustained damage.
        The second factor would be the supply increase from Permian in the US by June-end as the prices hold current levels above $40. The expectation is of 500,000 bpd of shale oil recovery by the month end.
        But there are supportive factors too
        • The first half of 2020 saw supply surplus of 11 mln barrels per day, while the second half of the year is estimated to show deficit of 2.5 mln barrels per day.
        • BoAML reports that crude averaged less than $50 only once in 2016 in the last 15 years.
        • The global capex has come down to $240 bln in 2020 as compared to total spend of $332 bln in 2019.
        • The monthly reports from OPEC, IEA have raised their demand outlook for 2020 and 2021.
        • The OPEC and its allies compliance is expected to improve. Their compliance was at 87 percent in May, with Russia reporting 90 percent adherence. The countries which have fallen behind targets will compensate in July, August.
        • Demand recovery has been reported in India, Japan, France and Germany.
        • Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
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