Oil prices would take a few years to return to pre-virus levels

Oil prices would take a few years to return to pre-virus levels

BAKU, Azerbaijan, March 27

By Leman Zeynalova – Trend:

Oil prices would take a few years to return to pre-virus levels, Trend reports citing UK-based Capital Economics research and consulting company.

“We think there will be some permanent loss of commodity consumption in 2020 owing to virus-related disruption to activity, but we do see prices picking up later this year as economic growth starts to revive. Few would dispute that measures to contain the coronavirus will cause a recession in the global economy in the first half of this year. As a result, we have made significant downward revisions to our Q1 and Q2 forecasts for commodity demand and prices,” the company said in its report.

However, the longer-term impact is still highly uncertain, according to Capital Economics.

“We have outlined what we think are three plausible scenarios for global GDP and thought it would be useful to consider their implications for commodity prices. In the first scenario, there is no permanent loss of output and GDP growth soon returns to its pre-virus path. All the hit to commodity demand and supply is recouped relatively quickly and prices rise rapidly. On the demand side, this implies that people – on top of their normal level of consumption – make all the journeys, build all the houses and buy all the goods, for example, that they would have done earlier in the year. On the supply side, it suggests that all the output lost because of closures at mines, refineries etc. will be produced later in the year. We think this is highly unlikely and, in some cases, physically impossible,” reads the report.

In the second scenario, there is a large loss of output and economies only gradually return to pre-virus growth, according to Capital Economics.

“This would lead to lower overall commodity consumption. In the case of oil, for example, once the virus has passed, people are unlikely to increase the number of routine journeys (such as school runs and commutes) that they would normally make. It also seems likely that travel restrictions could persist for some time. For the metals, it may be that there is pent-up demand for cars, for example, but we suspect that consumers will remain cautious for a while. On this GDP path, supply could fall a little initially but would be restored at a later date. Accordingly, prices would take a few years to return to pre-virus levels,” said the company.

In the third, and worst, scenario, there is a permanent loss of output and economies stabilise on a lower growth trajectory, reads the report.

“Historically, there is a close correlation between economic activity and commodity prices. That said, we would envisage a much larger supply response once it becomes clear that demand is going to be permanently lower for longer. Many higher-cost producers would close and market surpluses could actually fall more rapidly than in scenario 2. In the longer term, this may mean higher prices than under the other scenarios, but the intervening years would be more painful,” the company believes.

“All the signs are that governments and central banks are seizing the initiative and launching comprehensive policy support to avoid the worst-case scenario. Risks remain: bond markets will have to tolerate higher debt burdens and we have to hope that there is no return of the virus, to name a couple. But for now, our forecasts assume that the second scenario is the more plausible outcome.”

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Follow the author on Twitter: @Lyaman_Zeyn

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