SINGAPORE (April 3): Crude oil prices are unlikely to trade significantly higher in the short-term despite US President Donald Trump’s optimism that a price war between Saudi Arabia and Russia can be resolved, according to DBS Group Research.
This is because a truce is unlikely to happen without the inclusion of the US, which has become a major shale oil producer in the last few years.
That is why the market will likely remain oversupplied in the near-term with demand in “free-fall”, the brokerage warns.
DBS has kept its average crude oil forecasts in 2Q FY20 unchanged at US$23 a barrel for Brent crude and US$19 a barrel for West Texas Intermediate crude.
Yesterday, Trump made two postings on Twitter, expressing his hope and expectation that both Saudi and Russia would collectively cut production by 10 to 15 million barrels a day (mmbpd).
His tweets came following his purported conversation with Saudi Crown Prince Mohammed bin Salman, whom Trump claimed had also spoken to Russian President Vladimir Putin.
However, DBS doubts that Saudi and Russia would cut production by more than half, while allowing the US to continue to enjoy market share gains.
“Hence, any deal without US participation is unlikely,” DBS analysts Suvro Sarkar, Ho Pei Hwa and Jason Sum write in a note dated April 3.
Yet even if the US agreed to come to the negotiating table, the brokerage questions how this could be achieved in practice.
DBS notes that there are hundreds, if not thousands, of independent oil producers in the US.
It will likely be challenging to implement and enforce production limits on them, given the country’s pride in its free-market system and highly diverse upstream sector, it says.
Legal challenges could mount as a result, it adds.
On the demand side of the equation, the novel coronavirus (Covid-19) pandemic is complicating matters.
DBS estimates that Covid-19 will destroy this month’s oil demand of anywhere between 15 to 25 mmbpd in global supply.
The reduced demand, it says, will be inadequate to balance the market, even if taking into account a 10 to 15 mmpbd reduction in global supply.
DBS notes that supply will need to be “permanently” removed from the market for it to achieve some sort of balance, which take weeks to months.
“The lack of storage options would put downward pressure on oil prices in coming months and hopefully force producers to shut-in wells,” the analysts say.
