COVID-19 stabilization could push Brent oil prices to $50/b: Abu Dhabi bank

Brent crude prices could rise towards $50/b by the start of 2021, if the COVID-19 pandemic is contained, though the path may be choppy, said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“At the moment it is trading in a relatively tight band of between $40 and $45/b, and in the near-term, that’s the range we expect it to see it remaining in,” said Malik, on a July 16 webcast for the International Monetary Fund’s MENA Economic Outlook. “In a case of global environment where you see COVID-19 controlled and global demand continuing to pick up, we expect oil by the end of this year and into next year moving towards the $50/b range.”

OPEC and its allies, including Russia, had implemented record oil production cuts of 9.7 million b/d in May, as the market was wallopped by the pandemic, but with many countries easing lockdown measures and economic activity picking up, the alliance is set to ease the cuts to 7.7 million b/d in August.

“We do expect the supply-demand mismatch to reverse in July, where demand outstrips supply, thanks to the [OPEC+] supply cuts,” Malik said.

However, she noted that the sharp increase in inventories that were built in the first five months of the 2020 would take time to work down, even with the production cuts and pick-up in demand.

OECD oil stocks in May rose relative to the five-year average that OPEC+ has said it is targeting for the fifth straight month, coming in at 3.17 billion barrels — 209.5 million above the benchmark, according to the latest OPEC monthly oil market report.

Another potentially bearish factor is the re-adjustment in the US shale production. If oil prices rise too fast, US producers may not stay down for as long as the OPEC+ coalition is looking for, Malik said.

But an additional assurance of stabilization comes from the key Gulf producers — Saudi Arabia, the UAE and Kuwait — voluntarily implementing deeper cuts when the market requires.

In June, Saudi Arabia cut an additional 1 million b/d of its crude oil production below its quota under the OPEC+ agreement, while the UAE and Kuwait followed suit with announcements they will cut an additional 100,000 b/d and 80,000 b/d, respectively.

Those cuts were discontinued in July but contributed to a substantial tightening of the market.

“If we see demand side pressure emerging again the core [Gulf] producers will adjust production to support the oil price,” Malik said.

Current oil prices are still well below the budget breakeven prices for Gulf countries, but at a comfortable level for the economies from a fiscal stance, Malik said.

For 2020, Saudi Arabia’s fiscal breakeven price stands at $76.1/b, the United Arab Emirates is $69.1/b, Oman is $86.8/b, and Kuwait’s is $61.1/b, according to the IMF.

The IMF on July 13 said Middle East oil exporters, which form the core of OPEC, are in for extreme pain in 2020, revising downward its estimate of economic growth to -7.3%. It said its forecast reflects the “‘double whammy’ from oil price fluctuations (and supply cuts) and the pandemic-linked lockdowns.”
Source: Platts