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How long will tensions in the oil market last?

How long will tensions in the oil market last?

Economy
01 April 2020, 12:56 304
Unless the supply-demand balance is regulated...
 

Oil prices continue to fall sharply. Brent crude fell 9.5 percent to $ 22.77 and Texas crude fell 6.5 percent to $ 20.20. Oil prices have fallen to a 17-year low amid falling demand. This week, the world’s oil consumption will decline by 26 bln barrels, or 25%, since the measures of social distancing to battle the coronavirus already affect some 92% of the global GDP, Goldman Sachs says. Analysts including Jeff Currie and Damien Courvalin note that the current demand for oil is declining at a faster pace than anyone had predicted, and landlocked crude production in the U.S., Canada, and Russia is most vulnerable. There have been at least 900,000 barrels a day of announced shut-ins at the wellhead, they said. "The ultimate magnitude of these shut-ins which is still unknown, will likely permanently alter the energy industry and its geopolitics,” the analysts noted. How long will the chaotic situation last? What are the forecasts for oil prices in the coming months?
 
According to energy expert Zafar Valiyev, there are currently two main factors driving down oil prices. "The Vienna agreement expired at the end of March. At a meeting in the OPEC + format held on March 6, no general agreement was reached on extending the agreement until the end of the year. This was the main factor that created a shock effect on the market. Another reason for the drop in prices is the coronavirus pandemic, which is sweeping the world. Demand for oil products has fallen sharply. Traffic is severely restricted in countries in Asia, Europe, and the Americas. Therefore, the demand for light oil products has fallen sharply. Today, more than 700 plants around the world have reduced their processing capacity by 30 percent. In some plants, the initial refining of oil has been suspended altogether. That is, there are large volumes of oil on the market. If there is no additional intervention in the market in the coming months, prices may fall below current levels. Energy companies from Saudi Arabia, Kuwait, Iraq, and Russia have said they are determined to increase production from April. These countries also intend to increase their exports. If this happens, prices will fall below current levels,” the expert said.
 
The expert noted that for the oil to find its real value, the market must first be properly regulated. "The supply-demand balance plays a 30 percent role and the situation in the financial market plays a 70 percent role in shaping oil prices. If the supply-demand balance is not regulated and excess oil volumes circulate on the market, the situation will remain tense in the coming months. At the same time, if we look at the wars over oil prices, we can see that these wars do not last long. Then the issue of market regulation comes up again and production volumes and quotas are determined. Therefore, I believe that at the present stage, the OPEC + countries must unite their efforts to properly regulate the market,” he added.
 
Energy expert Ilham Shaban said there has been a downward trend in prices for four weeks now. "The end of the Vienna agreement caused a great deal of confusion in the market. The agreement reached within OPEC + expires on April 1. That is, more volumes of oil will be released to the market from April. On the other hand, a report stating that the demand will exceed supply by one million barrels in the second quarter was released. Also, the spread of the pandemic in Europe and the United States harms economic activity. As a result, the demand for oil is quite low. Russia, on the other hand, has closed its refineries on a seasonal basis. Therefore, it signed contracts to extract 2.1 million barrels more than the norm to European markets in April. This leads to a sharp drop in oil prices. The price of black gold on stock exchanges continues to fall. Prices may drop to $ 20. On April 8, the quarantine regime in China will be officially lifted. However, China's energy demand is also uncertain. However, it is unknown how long the quarantine regime will last in Europe and the United States. Therefore, prices are expected to be around $ 20-25 by May. Although 24 days have passed since the Vienna meeting, no talks have taken place yet. It is also known that the parties did not make any efforts to do so. There were only telephone conversations between the United States and Saudi Arabia. This does not send a positive signal to the market. After Saudi Arabia and Russia, countries such as Iraq, Nigeria and others have said they will increase production. On the other hand, some countries increase production without an official declaration. An example of this is Kazakhstan. Therefore, the situation in the market remains chaotic,” he said.

Shabnam Mehdizade