Oil prices will likely continue a generation-defining freefall as a result of the failure of Opec+ to come to an agreement on production cuts, says a report.

 

The price decline will continue until (i) either Opec+ members call off the endurance competition; (ii) some Opec members restore discretionary cuts; and/or (iii) relatively high cost US shale producers reduce production by either ending or slowing fracking, said the MUFG Oil Market Flash report. 

 

Should such a scenario unfold – given an already short positioned oil market – could lead to a sharp initial rebound in oil prices, it added.

 

The report said in Q2 2020, there could be a protracted period of oil prices at operational pressure levels of below $30/b, with markets potentially sporadically testing levels below $25/b.

 

Commenting on the Opec+ meeting, it said the unthinkable has played out in what was an absolute emergency Opec+ meeting between March 5 and 6 March to assess the hit to global oil demand caused by the coronavirus (COVID-19). The highly tense Opec+ meeting concluded with no deal to either extend or deepen output, after Russia held firm and did not commit to taking any action. 

 

"The extraordinary outcome caught us (and markets) by surprise given (i) the major slowdown in the global economy and its demand for oil, currently unfolding owing to the contagion of the COVID-19, as well as (ii) the prior articulation by the Russians that they will explicitly agree to further output cuts.

 

In the first sign of the next steps, Saudi Arabia has kick-started an all-out price war, by offering unprecedented discounts for its April 2020 oil output contracts (the deepest cuts in at least 20 years) for its main crude grades for European, Asian and US refiners, in a bid to entice them to purchase Saudi crude at the expense of other suppliers.

 

MUFG said: "Our econometric models now assume quarter end 2020 levels for Q1, Q2, Q3 and Q4 2020 at $28.6/b, $32.3/b, $35.6/b and $46.1/b, respectively. Specifically in Q2 2020, we do not rule out a protracted period of oil prices at operational pressure levels of below $30/b, with markets potentially sporadically testing levels below $25/b."

 

The report said it is not completely game over just yet and a key near-term upside risk is one where Opec+ quickly reconvenes and agrees on an output reduction. This is not the first time Opec and its allies have not been aligned on the most appropriate strategy, and both sides have been able to provide workable solutions in the past.  - TradeArabia News Service