Fears about a recession in the global economy, which may come due to the crisis in the energy market, dropped Brent prices by 7% in July. To date, the cost of a barrel has fallen below $103. Industry analysts polled by Interfax are convinced that quotes will fall by a few more dollars and remain at that level until the end of 2022.
To date, the main threat to oil prices are the risks of a recession in the global economy. Over the past months, experts have been predicting it against the backdrop of a significant increase in the cost of energy resources, provoked by the sanctions confrontation and the subsequent redistribution of supplies in the global market.
According to the managing partner of Kept (the former Russian division of KPMG) Anton Usov, the worsening situation in the global economy will not affect oil consumption, but will most likely lead to another price shocks. „The decrease in global demand could be driven by a global economic recession, although it is more likely that it will affect the worsening of the price scenario, rather than the volumes, given the previous decrease in consumption due to the coronavirus,” he said.
Kirill Tachennikov, director of the analytical department at Sinara IB, believes that the recession will cause a decrease in demand, but only in the short term. „As a rule, demand subsequently returns to its long-term growth trajectory,” the expert noted.
The high volatility of oil prices is due to the uncertainty in the economy. News around the market, first of all, affects pricing, and not the balance of supply and demand.
“A drop in demand would lead to a decrease in prices in the medium term, but we have a global regulator – OPEC +. It will simply reduce production quotas if demand sags significantly,” said Alexander Frolov, deputy director general of the National Energy Institute.
An important issue for the market will be the fate of the OPEC + deal, analysts agree. „Obviously, it is more profitable for oil exporters to maintain discipline and maintain prices at a level that stimulates investment in the industry,” adds Tachennikov.
US President Joe Biden visited Saudi Arabia last weekend. As a result of the talks, the American side announced agreements with the kingdom, which will assume obligations to maintain balance in the world oil market.
In particular, the United States „welcomed the 50% increase in production levels compared to what was planned for July and August.” We are talking about the June decision of the OPEC + alliance to increase quotas for increasing oil production not by 432,000 b/d, as planned, but by 648,000 b/d, both for July and August. At the same time, it follows from the latest OPEC report that Saudi Arabia, following the results of June, lags behind its allowed production level by 250,000 bpd.
An increase in supply on the market would further push oil prices down, however, according to Frolov’s calculations, in the short term the kingdom will be able to bring an additional 85,000 barrels per day to the market. „This is an extremely small value against the background of Russia’s lagging behind and short deliveries to the market from such countries as, for example, Libya. If we talk about fundamental factors, the market will hardly notice these volumes. Although the same Libya promised to restore supplies, it will be replaced by Nigeria threatens to come with its protests that could hit the oil industry,” Frolov explained.
According to the International Energy Agency (IEA), Saudi Arabia’s current free capacity is 1.6 million b/d. The organization believes that at the expiration of the OPEC + deal, the kingdom will be able to increase production to 11 million b / d and maintain it at this level for an extended period, although this may not be easy given its mature fields.
According to Usov, the maximum potential for increasing production in Saudi Arabia is about 2 million b/d compared to the current figure (to a level of just over 12.5 million b/d), but the country feels comfortable in the current price paradigm. „Constantly maintaining maximum production will lead to higher costs and faster depletion of the subsoil,” the expert said.
In turn, SberCIB Commodity Markets Strategist Mikhail Sheibe sees the kingdom’s potential to increase production to only 11.4-11.5 bpd. This is less than the ambitious plans announced by Saudi Aramco, but such a level of production will allow maintaining at least a minimum amount of free capacity.
„In the event of potential force majeure on the supply side, this could provoke much stronger price volatility than in recent years,” Scheibe said.
Compromise – $100 per barrel
Analysts polled by Interfax agree that the price of Brent in the second half of the year will be about $100/bbl.
In addition to the recession and the subsequent deterioration in demand, a new wave of the pandemic could affect the price correction. The market has already experienced a decrease in demand from China due to the introduction of severe restrictions on the coronavirus. It is possible that similar measures may be introduced in other countries, given the observed increase in the incidence. In particular, the World Health Organization this week stated a new wave of COVID-19 in Europe and called for prompt action.
Scheibe forecasts Brent at $105/bbl. and notes that its correction by the end of the year, in addition to the reasons listed above, may be affected by an increase in production in the United States and stabilization of production in Russia to a level close to the beginning of 2022.
Tachennikov does not rule out that if the risks of a recession and new pandemic restrictions increase, Brent prices may drop to $85/bbl, but notes that the equilibrium price level at the moment is $100/bbl. Usov adheres to a similar forecast. However, he does not exclude the pressure of the geopolitical factor on the cost of oil.
Analysts at Bank of America in the base scenario see the cost of Brent in 2022 at $102/bbl, but at the same time, they allow the price to fall to $75/bbl. during a recession or growth to $150/bbl. in the event of new European sanctions against supplies from the Russian Federation.
If there is a price ceiling
The worst-case scenario was voiced by JPMorgan: oil prices could „fly into the stratosphere” – up to $380/bbl. This is possible if Russia’s production is reduced to 5 million bpd. According to analysts, Moscow can take such a measure without undue harm to its own economy if Western countries impose a ceiling on oil prices from the Russian Federation.
Deputy Prime Minister Alexander Novak confirmed the day before: if such restrictions are introduced, supplies from the country will be reduced. „If these prices, which they are talking about, are lower than the costs for oil production, of course, naturally, Russia will not ensure the supply of this oil to world markets, which means that we simply will not work at a loss,” he stressed.
Analysts of the American Citigroup see the other extreme, predicting a drop in prices to $65/bbl in the event of a recession. This forecast is based on a scenario that excludes intervention by OPEC+ countries in the market and assumes a decrease in investment in the oil and gas industry, the bank said in a report.
Russian President Vladimir Putin agrees with the view that the introduction of a „price ceiling” on Russian oil will lead to a rise in prices. „Now we hear all sorts of ideas about how to limit the volume of Russian oil, limit the price of Russian oil – this is all the same thing that is happening with gas. It is even surprising that people with higher education say this, the result will be the same – an increase prices. Oil prices will skyrocket,” he said at a press conference following his visit to Iran.