Status Quo. After falling below $60/b in Feb/20 and reaching low levels of $19/b in Apr/20, Brent prices rose in May/20 and Jun/20 averaging $40/b in Jun/20. Many countries started lifting strict lockdown measures, but the world is still grappling with Covid-19 and its potential resurgence as activity tries to pick up. In response to the fall in demand, OPEC+ implemented temporary production cuts (9.7 mmb/d) that were extended through July. However, on 15th of July, OPEC+ announced its plans to add to the market in August, easing cuts to 7.7 mmb/d.
Short Term. Short-term consensus on oil prices is cautiously optimistic. On the supply side, this was supported by OPEC+ production cuts, albeit latest OPEC+ decision to start adding to the market in August may temper that optimism as it may be a delicate balancing act. Recent production decline, capex cuts, project delays and bankruptcies in the Non-OPEC E&P also add to the sentiment. On the demand side, post-lockdown gradual demand recovery and the oil inventory draws also support this consensus, but the uncertainty around the pace of recovery remains.
Medium Term. Medium-term consensus is still conservative on upside as higher prices may incentivise US shale producers (surviving, restructured and future ones) and potentially re-ignite market share wars. While the pace of demand recovery is largely dependent on medical and economic crisis management efforts. According to IEA Global Energy Review 2020, countries in full lockdown are experiencing an average 25% decline in energy demand relative to typical levels and countries in partial lockdown an average 18% decline. Doubts over the return of pre-Covid-19 demand are also being voiced with such factors as more permanent shift to remote work, less flying and social forces pushing towards energy transition.
Long Term. Long-term consensus is riddled with uncertainty. On the one hand, factors such as peak demand and transition to EVs and renewable/alternative sources remain in tact. On the other hand, according to IEA World Energy Investment 2020, the impact of today’s cutbacks in the oil industry will be felt only after a few years due to the lead times. By that time the world may be in a post-recovery phase without other sufficient alternative sources of energy.