BAKU, Azerbaijan, Jan. 8
By Leman Zeynalova - Trend:
The price forecast for Brent crude for 2020 has been revised from $62 /bbl to $65.0/bbl, Trend reports citing Fitch Solutions Macro Research (a unit of Fitch Group).
“The fundamental outlook remains bearish, but the global economic backdrop and broad market sentiment show signs of improvement. In the near term, elevated geopolitical risks in the Middle East will also serve to buoy prices, as escalating tensions between the US and Iran raise potential threats to supply from the region,” reads the outlook released by the company.
Fitch Solutions’ fundamental views are broadly unchanged, with its data signaling a loosening of the global oil supply and demand balance over H120.
“In recent months, the market has tightened: supply growth has slowed, while the call on crude has increased in line with seasonally stronger fuels demand and higher refinery run rates in the run-up to the implementation of the International Maritime Organization (IMO)'s 2020 sulphur cap. We do not believe that this tightness will hold, as supply growth reaccelerates, outstripping the growth in demand.”
“Our shift to a neutral-bullish outlook on prices is largely a reflection of broad stabilization in the global macroeconomic environment and improving investor sentiment. Fears of a recession are receding, trade tensions are subsiding and Brexit-related uncertainties have moderated in the wake of the UK election. This should bolster the appetite for risk, supporting risks assets including oil. Partly as a result of this shift in sentiment, our economists recently altered their outlook on the US dollar, from moderately bullis h to neutral (see ‘Neutral US Dollar View As Trade And Brexit Tensions Ease’, January 6 2020). This should provide further (albeit slight) support to oil, which is USD-denominated. More importantly, they note a brighter outlook for emerging market (EM) currencies (and EM financial assets more generally), as well as a notable pickup in real economic activity, with real GDP growth across the EM basket forecast to rise from 3.8 percent in 2019 to 4.3 percent in 2020. This should improve both demand for and sentiment towards Brent, given the dominant role of EMs in growing the global oil market.”
In the near term, the company sees additional strength in prices stemming from heightened geopolitical risk in the Middle East.
“The January 3 death of Qassem Soleimani, head of the Iranian Revolutionary Guards ’ Quds Force, during a US military airstrike in Iraq, marked a significant escalation in tensions between the US and Iran. At present, no oil supply has been physically disrupted; however, the risk of renewed attacks on oil tankers, pipelines and processing facilities is significant,” said the company.
“Even if oil infrastructure is not made a target, more direct confrontation between the two countries (with the US launching direct s trikes on Iranian assets and vice versa), raises the risk of a misstep by either side leading to a broader conflict. Soleimani’s death has also sparked tensions between Washington and Baghdad, leading to calls for the expulsion of US troops from Iraqi territories. Although any US withdrawal – if it occurs – would likely be gradual, the potential for its withdrawal has cast further uncertainty on the region. The oil market appears attuned to these threats and we see the ebb and flow of geopolitical risks in the Middle East fuelling sporadic premia in Brent over Q1.”
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