Wednesday 15 July 2020
 
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Moody's

Medium term oil prices trend lower

DUBAI, May 28, 2020

The coronavirus pandemic is hastening a structural change in aggregate demand for oil, reducing the oil industry's need to develop higher-cost reserves for reinvestment to support production levels and growth in the next three to five years. 
 
Moody’s Investors Service has reduced its medium-term oil price assumptions to $45-$65/barrel (bbl), down from $50-$70/bbl. 
 
“The lower price range reflects our view that oil prices will remain highly volatile, with periods outside the top or bottom ends of the range. Geopolitical issues or attempts to manage supply by the Opecplus group of oil-producing nations will also lead to price fluctuations from time to time.
 
Recovery in oil demand will be more subdued than overall GDP growth, Moody’s said.
 
Assuming a gradual economic recovery starting in the second half of 2020, the International Energy Association (IEA) estimates that by late 2020, world oil demand will return to levels some 6.5 (mbpd), or 6%, below pre-crisis levels.
 
The coronavirus lockdowns have effectively set up a real-time experiment over the digitisation of services, possibly bringing permanent changes in the nature of work in service industries, while reducing both business travel and commuting.
 
Government measures to reduce the spread of the coronavirus have restricted oil-intensive activities such as domestic and international air travel, which will recover more slowly than overall GDP. High inventories of both oil and fuels globally will further slow the pace of recovery in oil demand and prices.
 
The coronavirus lockdowns have effectively set up a real-time experiment over the digitisation of services, possibly bringing permanent changes in the nature of work in service industries, while reducing both business travel and commuting.
 
In response to the exceptional decline in demand, the global oil industry has mobilised to implement significant production cuts—about 10% from December 2019 levels. The Opec-
plus group of oil-producing nations has agreed to cut oil production for two years by about 7.0 mbpd from February 2020 levels, starting in May 2020. 
 
The agreement assumes further production cuts of 3.7 mbpd from private companies in the US, Canada, Brazil and Norway, which are not part of the Opec-plus group. With limited storage and low oil prices dominating short-term oil prices, we would expect strong cooperation from pec-plus members in balancing the physical market in 2020. 
 
To accelerate the rebalancing, Saudi Arabia announced an additional 1 mbpd production cut beginning in June 2020, and several other members of Opec are raising their initial commitments to cut production, said Moody’s.
 



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