Page 6 - LatAmOil Week 12 2020

LatAmOil COMMENTARY LatAmOil
Fitch cuts oil price outlook for
2020 on global recession fears
The agency has reduced its forecast Brent price from $62.50 per barrel to $41 or less
WHAT:
Oil prices have plummeted to levels not seen since the early 2000s.
WHY:
The COVID-19 crisis has sapped demand, while an impending supply war between producers is set to exacerbate the market glut.
WHAT NEXT:
Saudi Arabia and Russia appear committed to
a prolonged struggle
for market share, with both seeing US shale as a key target, but they
FITCH Ratings has cut its short and medi- um-term oil and natural gas price assumptions in expectation of very large market oversupply in 2020.
The agency cut its outlook for average prices for the Brent blend for 2020 from $62.5 per bar- rel to $41/bbl and its 2021 forecasts from $60/bbl to $48/bbl respectively.
“We assume the market will gradually rebal- ance in the next two to three years, but we have also trimmed our long-term assumptions to reflect continued efficiency gains, low break- even oil prices of many greenfield projects and a potential for demand to slow due to energy transition,” Fitch said in a note to subscribers.
Some economists are predicting that the series of “stop shocks” following the crash of oil prices in March and exacerbated by the coro- navirus (COVID-19) pandemic will tip the planet into a global recession of -0.5% this year, although there is still no consensus on just how bad things will get.
Massive oil oversupply in the works
Fitch estimates the crude oil market will be “massively oversupplied in 2020,” because of waning demand due to the coronavirus out- break and growing production following the OPEC+ failure to agree on output cuts.
“Saudi Arabia intends to increase produc- tion from April and utilise its significant spare capacity. This could keep the Brent price below $40/bbl for the rest of this year, as the magni- tude of oversupply in 2020 in various scenarios is likely to be much larger than the maximum of 1mnbarrelsaday(bpd)seeninthepastdecade,” Fitch said.
Fitch is more upbeat about the medium term and expects the market to rebalance over the next two or three years due to a recovery in demand once the coronavirus outbreak is con- tained, as well as the impact on the US shale production, which will slow at low prices. At the same time the agency suggested the OPEC countries will eventually cut production again to boost prices within the foreseeable future as their economies will come under pressure if prices stay too low for too long.
Both Saudi Arabia and Russia, the key parties to OPEC+, have fiscal break-even Brent prices above current market prices, at $91/bbl and $53/ bbl respectively, according to Fitch.
“We expect US shale production to return to growth when oil prices stabilise, as happened in 2016-2017, which would limit the extent of the price recovery,” says Fitch.
Gas glut, but prices to recover slowly
Natural gas markets are also vastly oversupplied, says Fitch. Europe in particular faces a gas glut following the unusually warm winter and the large supplies of gas in storage as a result of a gas war between Russia’s Gazprom and Ukraine’s Naftogaz over the renewal of the transit deal that was averted at the last minute in December. And thanks to the warm winter the gas glut extends beyond Europe.
“Current prices in Europe and Asia rarely cover the half-cycle cash costs (that include var- iable operating costs and transport to Europe) of natural gas and LNG suppliers, including Gazprom and US producers, and are therefore unsustainable,” Fitch said. “We assume the Dutch TTF and UK NBP gas prices in Europe will gradually recover to $5.5/mmcf over three to five years, broadly corresponding to the full-cycle costs of US producers, including ship- ping to Europe and capex. We assume the US Henry Hub price to recover to $2.5/mmcf in the long term.”
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(Image: Fitch Ratings)
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Week 12 26•March•2020