BAKU, Azerbaijan, July 7
By Leman Zeynalova – Trend:
Sustainable rally is expected in oil prices in the second half of 2020, Trend reports with reference to Fitch Solutions.
“We are relatively more sanguine on the outlook for crude than liquefied natural gas (LNG), given stronger underlying fundamentals for the former. In Q2, the demand-side pressures on oil have been greater, in large part because of its reliance on the transport sector, which has been among the sectors worst-impacted by the pandemic. Natural gas is less reliant on transport demand and has enjoyed some offset from the residential sector too,” reads the report released by Fitch Solutions.
However, the supply side is far looser for LNG than it is for oil: liquefaction capacity continues to roll on stream and, for most markets, the marginal cost of production is low, dampening the supply-side response to Covid-19, according to the company. “And there is no OPEC equivalent to step in and bring the market back to balance.”
For global benchmark Brent crude, Fitch Solutions forecasts a 31.4 percent decline in 2020, followed by 15.9 percent growth in 2021.
“The nadir for demand has likely been passed and in most key markets is staging an early recovery. Low prices and aggressive capex cutbacks have forced production shut-ins and are driving a sharp acceleration in decline rates globally, while OPEC+ has resumed its close management of the market. This points to tightening market fundamentals in H220 and a sustainable rally in prices,” reads the report.
For US Henry Hub, the equivalent forecast is -13 percent in 2020 and 9.1 percent 2021 and for Europe’s NBP, -35.9 percent and 6 percent, according to Fitch Solutions. “As we have indicated, gas market dynamics remain highly regionalized.”
The US benchmark has been driven lower by weakened domestic demand and LNG export shut-ins, but a sharp slowdown in shale production has helped to tackle the glut, the report says.
“In Europe, Covid-19 has added to an already bearish market outlook. Prices declined by 34.2 percent in 2019 and were set for further weakness this year, before the virus hit. Mild weather conditions and increasing penetration of renewables in the energy mix have curbed demand. Supply is relatively inelastic to price and so inventories have swelled,” said Fitch Solutions.
“Moreover, Europe acts as the market of last resort for LNG, and prices have been forced to record lows as buyers struggle to absorb the excess supply amid the outbreak of the coronavirus. For both the US and Europe, we expect a combination of falling local production and a post Covid-19 recovery in demand to support prices higher. This stands in stark contrast to the LNG market, where supplies will rise markedly in the face of still-impaired demand. As such, our outlook for contract prices – both gas- and oil-indexed is substantially better than for spot LNG, over a 12-24 month horizon.”
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