The combination of the COVID-19 outbreak and the recent oil pricing war between Saudi Arabia and Russia has created business disruptions worldwide, most recently with a stock market crash following the plunge in oil prices after Saudi Arabia slashed crude prices over the weekend. Previously agreed upon OPEC (Organization of the Petroleum Exporting Countries) production cuts are set to expire at the end of March, and with that Saudi Arabia can potentially pump as much oil as it wants – therefore potentially plummeting oil prices even further.
Practice Leader for Global Economics and Scenarios, Ryan Connelly provides his initial insights on the business impacts for the remainder of 2020 below.
- Though we already revised down prices substantially last week based on lower demand outlook, we again revised prices further following the (perhaps temporary) end of the OPEC+ agreement.
- We expect Brent crude oil prices now to average in the low $40s/Bbl this year, with the lowest prices seen in H1 and a rebound as global growth picks up mildly in H2. This is based on the assumption that oil prices average sub-$40 for the rest of 1H 2020, rising into the mid/high $40s in 2H 2020.
- Though we think it is likely that Russia and Saudi reach an agreement to restore the previous quota arrangement, that will not push average prices back up over $50/bbl for 2020. Amid weak global demand and a sudden flush of Saudi exports in March/April, inventories are expected to rise substantially.
- We have good reasons to suspect that both Russia and Saudi Arabia will want to come to a new agreement, as there is no other way to see prices recover in 2020 otherwise. Neither country’s economy can withstand such low energy prices for an extended period, though Russia is more tolerant than Saudi Arabia.
- However, the global growth outlook is deteriorating sharply, and most oil analysts now forecast very low, to significantly negative, demand growth in oil in 2020. The US is still increasing production (though this should slow in 2H 2020 if prices remain depressed). Unless we see significant further cuts in OPEC+ production, we will see substantial inventory builds that will keep prices depressed through the rest of 2020.
Our team of analysts are conducting additional research into the potential impacts on the global economy and business environment. Subscribe to The Lens, our weekly newsletter covering the latest global events, for the most up-to-date coverage on COVID-19.
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