Oil Price Forecast: MUFG say $25 Possible
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Oil prices can fall significantly lower according to economists at global investment bank MUFG who have reacted to the surprising outcome of Friday's OPEC+ that saw oil producers fail to agree a deal on production cuts.
The oil cartel - which now includes Russia under the OPEC+ banner - met to try and thrash out a deal to cut supply in order to stabilise prices in the face of a drop in demand owing to a coronavirus-linked economic slowdown.
"The unthinkable has played out in what was an absolute emergency OPEC+ meeting between 5-6 March to assess the hit to global oil demand caused by 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," says Ehsan Khoman, Head of MENA Research and Strategy at MUFG.
The two benchmark crude oils fell by over 30% at one stage following the opening of global markets on Monday, the largest daily decline since the lead up to the Gulf War of 1990.
Saudi Arabia have committed to increase output in April after Russia declined OPEC’s proposal to enact steep production cut. Saudi Arabia also cut its official crude selling price in what looks like a clear attempt to take market share from Russia and the U.S.
After all, Saudi Arabia is best placed to weather any falls in oil prices owing to the country's ease of extraction.
"We mark-to-market our entire quarterly 2020 oil price forecasts, reflecting the two highly uncertain simultaneous bearish shocks – a demand destruction caused by COVID-19 and a supply surge caused by the unequivocal oil price war started instigated over the weekend by OPEC and Russia," says Khoman.
Market consensus had been for 1.0m barrels per day of additional production cuts to be agreed by OPEC+. Following the failure to reach agreement, Saudi Arabia said it now plans to raise its oil production to more than 10m barrels a day from around 9.7m currently.
Market talk was that the Kingdom might increase output to as much as 11mn b/d, vs the 9mn b/d that it was proposing under the agreement that it had offered (but Russia rejected). Its total capacity is estimated at around 12mn b/d.
"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 contract (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," says Khoman.
MUFG's models now forecast quarter-end 2020 levels for Q1, Q2, Q3 and Q4 2020 at $28.6 a barrel, $32.3/b, $35.6/b and $46.1/b, respectively.
For the second quarter of 2020 they do not rule out a protracted period of oil prices at operational pressure levels of below $30 a barrel.
"Brace for a world with no oil price floor and don’t rule out sub-USD25/b," says Khoman.
