Oil prices will remain highly volatile as the coronavirus pandemic is hastening a structural change in aggregate demand for oil, Moody’s has said in a report.
Consequently, Moody’s reduced its medium-term oil price assumptions to $45-$65 for barrel, down from $50-$70.
“Medium-term oil prices trend lower as industry focuses on lowest-cost reserves as the coronavirus pandemic is hastening a structural change in aggregate demand for oil. This reduces 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 said.
Moody’s said the price range reflects its 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 Opec+ group of oil-producing nations will also lead to price fluctuations from time to time,” Moody’s said.
The coronavirus-related recession in 2020 and the slow recovery of overall economic activity will dampen demand for oil, among other commodities. Assuming a gradual economic recovery starting in the second half of 2020, the International Energy Agency (IEA) estimates that by late 2020, world oil demand will return to levels some 6.5mn barrels per day (bpd), or 6%, below pre-crisis levels.
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+ group of oil-producing nations has agreed to cut oil production for two years by about 7mn bpd from February 2020 levels, starting in May 2020, Moody’s said.
The agreement assumes further production cuts of 3.7mn bpd from private companies in the US, Canada, Brazil and Norway, which are not part of the Opec+ group.
With limited storage and low oil prices dominating short-term oil prices, we would expect strong cooperation from Opec+ members in balancing the physical market in 2020, Moody’s said.