Page 14 - ISQ UK Aprl 2020

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We forecast global demand down 1.5 million bpd
for 2020, steeper than the declines from 2008 and
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2009 (the two financial crisis years) combined.

Oil Markets

Pavel Molchanov, Director, Energy Analyst,
Equity Research

The oil market is facing an unprecedented one-two punch,
but we envision recovery by 2021.

Oil’s bear market dates back to February, with the clear culprit collaborated as part of the OPEC+ coalition over the previous three
being the impact on global oil demand arising from the years, but no longer. Saudi Arabia is vowing to increase oil
transportation and economic disruptions due to COVID-19. During production to record levels in response to Russia’s refusal to
January and February, COVID-19 had been seen as a problem cooperate with new production guidelines. This price war, to be
largely contained within China. Throughout March, however, it clear, is not against US shale; this is a key contrast to the 2014-2016
became clear that the impact would be truly global in scope. As the price war. Saudi Arabia can see perfectly well what has been
public health situation in China shows encouraging signs of happening in the US oil industry: depressed rig counts and sharply
stabilisation, the opposite is true practically everywhere else. As slowing production growth, even before the dramatic events of
governments impose flight restrictions and other travel bans, recent weeks. The Saudi vs. Russia fight is partly economic, and it is
enforce lockdowns, and require non-essential businesses to close also political. Russia will have a major constitutional referendum
doors, the impact on oil consumption is unlike anything in modern on 22 April, arguably the most sensitive moment in domestic
history. Numerous airlines are reporting over 50% flight politics during Vladimir Putin's 20 years in power. In the run-up to
cancellations. With 800+ million students affected by school and the referendum, the Kremlin is stirring up nationalist fervour at
university closures, that means many fewer buses and cars on the home, and that translates into more intransigence than usual in
roads. Countless millions of people are working from home, due to foreign policy. Moreover, the Saudis and Russia have never stopped
government directives or company instructions. In the second being at loggerheads over Iran and Syria. Here is the good news:
quarter of 2020, the impact of all these disruptions is likely to assuming that Putin wins the referendum, we anticipate that Russia
exceed 5 million barrels per day (bpd), or 5% of global demand. will become more receptive to international deal-making, opening
Needless to say, the timing of improvement in demand, enabled by the door to an agreement with Saudi Arabia in May/June, followed
the easing of the various restrictions, will largely be a function of by normalisation of Saudi oil production. It bears mentioning that
medical and public health developments vis-a-vis the virus. the Saudi economy needs $70/Bbl Brent crude to balance its all-in
Assuming that this second quarter figure marks the peak of impact, fiscal requirements. Moreover – and this is another big distinction
we forecast global demand down 1.5 million bpd for 2020, steeper versus 2014-2016 – Saudi Aramco (its state-owned oil company) is
than the declines from 2008 and 2009 (the two financial crisis years) now publicly traded. Does the Saudi crown prince want to deal with
combined. angry domestic investors who are seeing losses from the IPO price?
Again, this factor, a key test of the royal family's credibility, did not
Sometimes, when it rains, it pours. Such is the case with the oil exist four or five years ago. Russia’s economy is less oil-sensitive,
price war between Saudi Arabia and Russia, which emerged but it would also begin to feel real pain within months. Thus, we
suddenly and dramatically on 7 March, compounding the already look at this Saudi-Russia breakup as a transitory issue.
ultra-bearish demand backdrop. These two countries had

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