APPEC: Brent price outlook clouded by market uncertainty, volatility – industry experts
The oil industry is in the middle of a huge demand shock, thanks to the coronavirus pandemic, and it could be potentially thrown into further chaos as the risk of a fresh wave of infections and price volatility, among other factors, linger, industry experts said during the 36th Asia Pacific Petroleum Virtual Conference, or APPEC 2020.
“The world needs to be prepared to see the volatility we’re going to have in the next 12-24 months,” Giovanni Serio, global head of research, Vitol, said during a panel discussion at the event.
“We’re used to an oil industry where the shock usually comes from the supply side, and therefore, we always think about the role of OPEC in terms of its response to a sudden shift in supply … now we have an absolutely unprecedented shift and shock on the demand side,” Serio added.
The biggest worry today is the fragility of the oil producing countries as supply has outpaced demand, said Ed Morse, managing director and global head of commodities research at Citigroup. Still, he said that they were “uncharacteristically bullish” about the crude price outlook as inventories were being drawn down. According to Morse, Brent crude will likely average $48/b in Q4 2020 and $55/b in 2021.
OPEC and its allies in May implemented a 9.7 million b/d production cut accord. The cut tapers to 7.7 million b/d from August to December, and then down to 5.8 million b/d from 2021 through April 2022.
Platts on Sept. 14 assessed international physical sweet crude oil benchmark Dated Brent at $38.395/b and sour crude benchmark Cash Dubai at $38.855/b.
Meanwhile, Chris Midgley, global head of analytics, S&P Global Platts, said they were “a little less bullish” as far as the Brent price was concerned, with Platts Analytics forecasting it to hover around $45/b at the end of the year.
The loss of shale production in the US due to capital expenditure cuts and rigs being taken out should provide some support to the market, particularly as winter demand approaches, Midgley said.
Moving into 2021, the market does get a little bit tighter but there is plenty of pent up supply, he said, adding that the risk of a fresh wave of COVID-19 infections could pressure demand further amid fairly comfortable supplies.
It is no longer about shocks in supply and demand but it is also about the sentiment of the market, the sentiment of the customers and the sentiment of the public that really impacts, Mohd Yusri Mohamed Yusof, VP refining and trading, downstream, at Petronas said, adding that being agile was the need of the hour.
Moving forward, energy transition and environmental awareness will be key themes for the industry, he said. “We’ll come out of this crisis with a difference, especially from the consumer, to which we the producers have to respond to,” he added.
Because of the crisis, there is a strong structural impact on investments in the sector, Ahmed Ali Attiga, CEO of Arab Petroleum Investments Corporation, or APICORP, said.
In oil and gas and the energy sector, in general, about $80 billion of capex cuts have been announced for 2020. That’s a decrease of 30% over 2019 investment budgets in the sectors, Attiga said.
“From a funding perspective, the energy sector faces two key problems … one is a relatively low shareholder return and the second is squeezed margins across the value chain,” Attiga said. “Where is financing going to come from and particularly so in a period of acute crisis similar to what the world or the sector is seeing today?”
Meanwhile, the outcome of the US election could also have a significant impact on the energy market, Midgley said.
Depending on the outcome, with the Democrats, Iranian and Venezuelan crude oil production could perhaps come back into the market place relatively quickly, which would then add to the supply and trigger a supply-driven shock, Midgley said.
While the discussion hinges on fundamentals, the role of technology cannot be ignored, Etienne Amic, CEO of VAKT said.
“We’re seeing a lot of digital transformation in a short period of time … I think it’s showing in our day-to-day life but also in the oil trading industry,” Amic said. “I think the next time it [an oil shock] happens, there will be a lot more visibility than the previous ones,” he added.