Brent should stay at $30 for some time with potential downside risk


David Lennox, Resource Analyst at Fat Prophets, says oil can quickly benefit from improvement in economic activity

Oil is back on the boil. There was perhaps some optimism around the ongoing production cuts and about the partial reopening of economies around the world. What are you reading into this?

Certainly. Now we will be looking at the expected 10 million barrel cut coming out of Opec and its allies. So that is certainly going to give the market some relief, if we do start to see those production numbers falling. Also, as you have already mentioned, we are now starting to see some countries opening up and moving slowly back towards perhaps more normal life. Oil is one of those particular commodities that can very quickly benefit from economic activity improving. So we have seen oil prices come up from what were substantially record lows just two days ago.

What are some of the indicators that tell you that demand has probably bottomed out? Because you talked about the production cuts anticipated from Opec this week. Have the concerns on the demand side really abated?

You have seen something like 25 to 30 million barrels of oil getting destroyed by the Covid-19 pandemic. We would be expecting to see some minor improvement in demand, as we start to see countries opening up. At this point in time, we are not expecting to see any further demand destruction. So we are not hoping to see oil prices go to any further lows over the next few trading days, as the trade has become a little more confident that demand is going to start improving. We will then start to see them looking back to how supplies may react, and also what sort of storage facilities are available. Because you have got to keep loss-pumping at least 25 million barrels because we have only gained something like 10 million barrels in cuts. That still leaves out a significant surplus in production, and that could still put pressure on the oil prices going forward.

Still looking uncertain possibly, but if we do see some stability return over the summer, where do you see the prices settle at?

We do not believe now that we are going to see any more negative numbers. For sometime now, we thought it would probably trade back towards $30, but there would be continued pressure on the downside. So we would not see it break through that $30 range for some time. We are expecting Brent to trade around $30 with potential for further downside risk, should we see a rise of Covid-19 numbers again, or we start to see perhaps countries revert to lockdown very quickly. That sort of action will flow into oil price and that is why we are seeing it so volatile. It is primarily because there are a lot of moving parts that traders are trying to build into their forecasts.


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