Page 11 - ISQ UK July 2020

JULY 2020

Oil Prices Set for Recovery into 2021 and Beyond

Pavel Molchanov, Director, Energy Analyst, Equity Research

It is a good bet that none of us will ever forget seeing
West Texas Intermediate (WTI) oil prices at a negative The demand picture into the second half of 2020
$30 per barrel. Was that the bottom? In a word: Yes. The should continue to improve, ... but it would not be
extraordinary sight of negative pricing marked the worst realistic for demand to fully normalize in 2021.
of the COVID-19 pandemic's impact on global oil
demand. While sub-zero prices are unlikely to be
repeated, that does not mean that it will be all smooth SUPPLY AND DEMAND
sailing from here on out. Demand recovery to pre- We believe that the worst of COVID-19’s demand impact is in
COVID-19 levels is unrealistic until 2022, so supply will the rearview mirror, having peaked in April at upwards of 20
million barrels per day (bpd). The initial recovery since then
need to play a key role in rebalancing the market.
reflects, above all, the timing of economic reopening decisions
by governments. We have been tracking reopening policies in
NEGATIVE OIL PRICES? 80 countries, and here is the synopsis: of the 4.3 billion people
First, about those negative prices. That was a very short-lived who have been under a lockdown at some point since January,
phenomenon – just a few days in mid-April – and, to clarify, it was over 99% have some reopening, including 80% with what we
specific to WTI. WTI, the price most US investors see, is not always define as reopening concluded. At this point, further reopening
indicative of global oil market fundamentals. In April, the overall is purely a matter of ‘depth’ rather than ‘breadth’, whether
oil market panic was compounded by a WTI-specific issue: using a sectoral approach or along regional lines. The positive
storage in Cushing, Oklahoma (where WTI contracts are priced) read-through for transportation activity is confirmed by traffic
was reaching capacity. This is what’s called oil-on-oil competition: congestion data, as well as commentary by refiners and other
literally, not enough room to put the extra barrels. Internationally, energy companies during the recently concluded reporting
while the oil market was also under intense stress, prices did not season.
go negative, because the storage issues were less pressing. We do
not envision a return to negative prices, but if it were to happen The demand picture into the second half of 2020 should
again, investors should focus on Brent – the global benchmark – continue to improve as the various countries move along their
rather than WTI. reopening roadmaps, but it would not be realistic for demand

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