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Oil prices could find themselves going much lower in the next few days and weeks before bottoming out – as low as $10 – with prices eventually recovering to find support at a price range between $30-$40 as the COVID-19 outbreak starts to slow down.
“With the additional quarantines that are now being put in place in Europe, this could see oil demand losses of up to 10 million barrels per day (bpd), which is so unprecedented and something I have never seen in 13 years as an oil analyst,” said Bjornar Tonhaugen, head of Oil Markets at Rystad Energy.
“Oil prices unfortunately might go down below $20 a barrel and maybe down to $10 depending on the situation,” he added.
Oil markets on Monday saw Brent trading at $28.35 and West Texas Intermediate (WTI) on $26.18 at 1pm UAE time, with prices continuing to face heavy pressure as a result of global lockdowns to try and contain the spread of COVID-19.
Tonhaugen said oil prices would struggle to find room for support with quarantine and lockdown measures likely continuing throughout April.
“It’s all about how low will demand be and for how long, it’s not the virus itself but rather the containment measures that are being put in place that is affecting demand.
“In our scenario the global demand loss in April might be very similar to March, which is around a loss of 10 million bpd, and so the situation doesn’t look like it’s going to improve. So in the short that is why oil prices are going to slide until it reaches the floor,” he added.
Tonhaugen said prices could see a recovery to as high as $40 once containment measures begin to ease as the COVID-19 virus begins to slowdown.
“We can hope that OPEC maybe without Russia can resume a production output deal around July once they have more clarity on demand and with the worst of the coronavirus now over by then.
“If that happens oil prices can recover back to the $30-$40 range… Getting back to the $50 range I think we will have to wait for a longer period,” he added.
Tonhaugen said OPEC producing nations such as the UAE were well positioned to handle the current low oil prices thanks to its low production costs among other factors.
“The UAE has quite a reasonable budget break even price [with oil prices] and so I think they will be able to withstand this.
“The UAE also has a very strong economic sovereign wealth fund and they have a much lower cost of production compared to others,” he added.
Shale revolution
One of the big players to lose out on the current slide in oil prices according to Tonhaugen is the US shale revolution.
“This will have delayed the shale expansion once again for a period, but then shale will recover and will still be there.
“If oil prices stay at the $30 range for the whole year this will probably delay shale by one to two years. Shale will need prices at $40, that’s their important threshold especially when it comes to WTI and their pain point,” he added.
Tonhaugen says the crash in oil prices could in the long term bring US producers to the same table as OPEC and Russia in an effort to regulate global oil markets.
“I think that’s the only way to actually restore balance if we have a global coordinated arrangement so that all major oil producers work together to try and make reasonable adjustments.
“It is a reasonable scenario now given the severity from both the supply and demand side, and so that is something that could be on the table when things calm down,” he added.
