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Oil to remain depressed in the near term

Waheed Abbas/Dubai
Filed on January 26, 2020 | Last updated on January 26, 2020 at 05.23 am
Oil to remain depressed in the near term

(AFP)

Oil prices will remain depressed to trade in a narrow-range in the near-term despite Opec+ forecast that crude demand will increase by 1.22 million barrels per day in 2020 as oversupply, coronavirus and rising US oil rig counts are expected to keep the crude prices under pressure in near future.

Analysts believe that though the geopolitical tension between Washington and Tehran is receding, the issue of coronavirus, worsening with every passing day, will assert more pressure on oil prices due to less demand in world's second largest economy amidst travel warning across the Asian countries.

It is estimated that the Brent will trade between $60 to $65 a barrel as investors believe that geopolitical issues, coronavirus outbreak, US-China trade, slow global economic growth will keep oil price in tight range during the first quarter.

Plunging 2.2 per cent on Friday, oil has fallen 7.4 per cent last week to $60.69 on the weekend, its biggest weekly decline in more than a year. While WTI fell 6.4 per cent last week to $54.19 a barrel, falling 2.5 per cent on Friday.

Oil had jumped to a 7-month high above $70 a barrel earlier this month after Iranian major-general Qasem Soleimani was killed in a drone strike by the US army. But the price retreated later and are now trading at $60 a barrel.

"After the trade deal between China and the US, it was believed that the crude prices will pick up due to increased demand. But the outbreak of coronavirus dashed all hopes. Owing to the slump in demand, there is a concern of oversupply, which has sent the international crude oil rated in downward spiral," said Angel Broking, deputy vice-president at Anuj Gupta.

Since China is the world's second largest consumer of oil, any attempt by the world's second largest economy to curb travel for a long-term period will put pressure on crude. Also, the virus has spread to a number of other countries including Japan, Australia, US, France, Thailand, Nepal, Taiwan, South Korea and other countries. Therefore, a wider travel ban by other countries will bring oil price under further pressure in the near future.

"It's all about the coronavirus all the time, and we're not getting signs that things are getting any better," said Phil Flynn, an analyst at Price Futures Group.

"It's difficult to get a constructive view about the oil market until we see more declines in world inventory," said Andy Lipow, president of Lipow Oil Associates.

Oil rigs up

Interestingly, the latest US rig count data also showed that as energy firms added oil rigs for a second consecutive week. While the US government's latest supply report also showed oil reserves growing for an 11th consecutive week to a record high.

William O'Connell, editor at Focus Economics, said oil prices are expected to remain relatively suppressed this year due to ample supply and despite the recent extension of the Opec+ oil cut deal, heightened geopolitical tensions and the recent signing of the "phase one" trade deal.

"Nevertheless, the recent episode once again highlights how oil prices still remain sensitive to developments in the region," he said.

Focus Economics analysts see prices averaging $62.8 per barrel in 2020.

Derek Halpenny, head of research for global markets in Europe, Middle East and Africa at MUFG, foresees oil average at $62.3 a barrel in 2020, driven by absent growth and geopolitical tension escalating into material shocks. MUFG estimates oil trading between $66.5 a barrel in first quarter 2020 to $56.6 in fourth quarter this year.

Bank of America Global Research has also raised its 2020 oil price forecasts on Monday, citing risks to supply from the Middle East, an improving demand outlook and higher Opec+ compliance to deepen output cuts. The bank upgraded its average 2020 Brent price outlook to $62 per barrel from $60, and West Texas Intermediate (WTI) price forecasts to $57 from $54. It expects global demand to grow by 1.1 million barrels per day during this year, while its supply and demand outlook suggested a surplus of 190,000 barrels per day.

Opec has also projected an increase in the global demand for oil to 100.98 million barrels per day during 2020, an increase of 1.22 mbpd.

Barclays has also forecast 2020 oil demand to rise by 1.4 million bpd, up from growth of 900,000bpd in 2019, and an increase of 50,000bpd from its earlier forecast, on an expected recovery in global economic activity The demand growth will be led by emerging market countries in Asia and Latin America.

- waheedabbas@khaleejtimes.com


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