- Crude oil prices could plunge below $20 a barrel in the second quarter, according to nearly a third of respondents in a CNBC survey of 30 analysts, strategists and traders.
- Some analysts believe crude oil prices could fall to as low as $10 a barrel as the coronavirus outbreak has severely dented demand.
- Analysts are also skeptical that Saudi Arabia and Russia will agree to major cuts in supply.
The oil price bust may not be over.
A historic demand shock sparked by the coronavirus pandemic is set to worsen in the current quarter, undermining any coordinated effort by heavyweight producers Saudi Arabia, Russia and the United States to cut supply aggressively and rebalance the market, according to a CNBC survey of 30 strategists, analysts and traders.
Episodic spikes of $20 a barrel or more in benchmark crude oil futures of the type seen last week cannot be ruled out as rivals Saudi Arabia and Russia attempt to reverse a damaging battle for market share and engineer a global supply deal which could cut up to 15 million barrels a day, the equivalent of about 10% of global supply.
But such price rallies are unlikely to last, according to the findings of the CNBC survey conducted over the past two weeks.
Brent crude futures, the barometer for 70% of globally trade oil, are likely to average $20 a barrel in the current quarter, according to the median forecast of 30 strategists, analysts and traders who responded to a CNBC survey, or 12 out of 30 respondents.
However, nearly a third, or nine of those surveyed, said prices may drop below $20 a barrel this quarter.
Amongst the more pessimistic projections, ANZ's Daniel Hynes saw the risk of prices in the 'mid-teens' while JBC Energy's Johannes Benigni warned that both Brent and US crude futures could 'temporarily' fall to around $10 a barrel.
The Organization of Petroleum Exporting Countries (OPEC), the supplier of a third of the world's oil, and its rivals outside the group are "of pretty limited relevance in this context, as they are neither likely to be willing nor able to stem the current demand shock," Benigni said.
Bearish forecasters said two forces would keep oil prices depressed in the second quarter — skepticism that Saudi Arabia and Russia would relent in their price war and commit to the deepest cuts in the producer group's history (with or without participation from U.S. shale producers) and a glut in the current quarter caused by a monumental collapse in global demand as the full economic severity of the global coronavirus pandemic unfolds.
"A demand drop of 10% is the New Normal with oil," said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years.
Global commodities trader Trafigura's chief economist Saad Rahim offered a starker prediction. Oil demand could fall by more than 30 million barrels a day in April, or around a third of the world's daily oil consumption, Reuters reported on March 31, citing his forecasts.
And even if Saudi Arabia, its OPEC allies and major producers outside the group such as Russia and the U.S. did agree on aggressive supply restraint, it's unlikely to materially drain global inventories that are closing in on what the oil industry calls 'tank tops', or storage capacity limits.
"The long and short of it is that the current rally will likely be short lived," Citigroup's oil strategists led by Ed Morse said in an April 2 report.
"The big three oil producers may have found a way to work together to balance markets, but it looks like it is too little too late. That means prices would have to fall to the single digits to facilitate inventory fill and shut in production."
Fatih Birol, executive director of the International Energy Agency said oil inventories would still rise by 15 million barrels a day in the second quarter even with output cuts of 10 million barrels a day, Reuters reported on April 3.
Citi expects Brent to average $17 a barrel in the current quarter and warned Moscow, Riyadh and Washington "cannot in the end stop prices from possibly falling below $10 before the end of April."
Plus, travel restrictions, border closures, lockdowns and economic disruption caused by 'social distancing' and other measures taken by governments globally to slow the spread of the virus will exact a heavy toll on oil demand and could even linger when the virus clears, clouding the prospects of a recovery.
"As for the second quarter or even the third, I don't see a V-shaped recovery for prices," said Anthony Grisanti, founder and president of GRZ Energy, who has over 30 years of experience in the futures industry.
"The longer people are shut in the more likely behaviour will change…I have a hard time seeing oil above $30-35 a barrel over the next 6 months."
Standard Chartered oil analysts Paul Horsnell and Emily Ashford said they expect "an element of persistent demand loss that will continue after the virus has passed, driven by permanent changes in air travel behavior and the demand implications of businesses unable to recover from the initial shock."
With demand at near-paralysis, oil and fuel tanks from Singapore to the Caribbean are close to brimming - stark evidence of the global glut.
Global oil storage is "rapidly filling – exceeding 70% and approaching operating max," said Steve Puckett, executive chairman of TRI-ZEN International, an energy consultancy.
Citi's oil analysis team and JBC Energy's Johannes Benigni even warned of the risk of oil prices turning negative if benchmarks drop below zero, effectively meaning producers pay buyers to take the oil off their hands because they've run out of storage space.
"Theoretically, the unprecedented stock-build might mean negative oil prices in places, should the world or some regions run out of storage and if higher-cost production is stickier than thought," Citi analysts said.
Despite the bearish consensus, nine survey respondents held a more constructive view. Within that group, six forecasters expected Brent crude prices to stabilize around the mid-to-late twenties in the second quarter while one called for $30 a barrel.
Tony Nash, founder and chief economist at analytics firm Complete Intelligence, and independent energy economist Anas Alhajji topped the range at $42- and $44 a barrel, respectively.
U.S. shale producers, who need $50 to $55 a barrel crude oil to just break-even, are struggling to maintain operations in a depressed price environment. That's led to cutbacks in production and capital spending, job losses and bankruptcies across the U.S. shale industry and globally.
The oil market is underestimating such a shake out and its future impact on rebalancing the global oversupply, Alhajji said.
"Shut-ins are already taking place. Companies made major spending cuts and many will cut again."
Markets are also downplaying the extent of the post-virus rebound on oil demand, Alhajji and Nash claimed, though determining the endpoint to the pandemic is near-impossible.
"We expect initial excitement over demand in May as the West comes back online, then it falls slightly as expectations are moderated going into June," Complete Intelligence's Nash said.