Capital Economics: Saudi Arabia, Russia both expected to raise oil output
BAKU, Azerbaijan, March 10
By Leman Zeynalova – Trend:
Saudi Arabia and Russia are both expected to raise oil output, as they refused to agree with further cuts, Trend reports with reference to UK-based Capital Economics research and consulting company.
“Against a backdrop of a coronavirus-related slump in demand, Saudi Arabia appears to have abandoned efforts to balance the oil market and is instead aiming to protect market share. Its pledge to significantly raise production from April will result in a large market surplus. Therefore, we now expect oil prices to remain low in the first half of this year, before rising in the second half as global growth starts to revive,” Capital Economics said in its report.
The report says that by way of background, it was widely expected that OPEC and its allies would agree to a significant cut in production at the meetings in Vienna late last week.
“However, Russia dug in its heels on Friday, refusing to agree to OPEC’s proposed 1.5m bpd cut. It takes the view, which we agree with, that curbing supply is not a viable long-term strategy. As OPEC had made the cut conditional on Russia’s agreement, the meeting collapsed, with the group not even deciding to roll over pre-existing cuts,” said the company.
Since then, Saudi Arabia has slashed the price of April oil deliveries to Asia and pledged to increase output to over 10m bpd (from just over 9.7m bpd in January), according to the report.
“Many commentators have dubbed this the start of a price war between Saudi Arabia and Russia. It is true that the world’s second and third largest crude producers will be competing on price. But we think that it is actually more of a war for market share and that it is not just between Russia and Saudi Arabia. Russia has made no secret of the fact that it is concerned about the growth of the US shale industry and of its view that repeated output cuts by OPEC were effectively handing market share to US producers,” reads the outlook.
Capital Economics has revised its estimates of supply to reflect the latest developments.
“We think that both Saudi Arabia and Russia will manage oil at current levels from a macro perspective and expect that both will raise output. By contrast, lower prices increase the likelihood of slower growth in US shale supply. This structural change in the supply picture coincides with additional downward revisions to our demand forecasts owing to the spread of coronavirus. Measures to contain the virus are already having a particularly negative impact on oil demand given that they typically involve restrictions on travel. And the possibility of mass self-quarantining will further cut travel. We have pencilled in y/y contractions in oil demand in Europe and the US in the second quarter, on top of the H1 contraction in China’s oil consumption. We now expect the market to be in a huge 3.2m bpd surplus in the second quarter and to remain in (a much-smaller) surplus for the remainder of this year,” said the company.
“Our new year-end forecasts for the prices of Brent and WTI are $48 and $45 per barrel respectively, which suggests only a gradual recovery compared to previous oil price slumps.”
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