May 8, 2020

THE OIL PRICE PLUNGE WILL RESHAPE THE ENERGY MARKET

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In Short

The temporary drop of the US oil price into negative at the end of April has been the starkest indicator of the stress energy markets are exposed to because of the COVID-related collapse in demand.
THE OIL PRICE PLUNGE WILL RESHAPE THE ENERGY MARKET
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Highlights:

  • The unprecedented drop in demand hit an oversupplied oil market, pushing prices to a 25–year low. They should remain below 35 US$/barrel for the rest of the year, and accelerate to 40-45 US$/bbl by the end of 2021.
  • Global inflation will likely slide below 1% this year. A spillover of low oil prices into inflation expectations could complicate central banks’ work.
  • In the medium term, big, low-cost supplier like Russia, Saudi Arabia and UAE could gain market shares, but in Gulf countries, fiscal and external balances may come under stress if the oil price remains unsustainably low for a prolonged period.
  • Highly leveraged US shale producers face a deep restructuring; surviving firms will benefit from the expected demand bounce back thanks to their flexible production process. Short term, yet, investment cuts will weigh on US growth.
  • Energy companies’ stocks remain depressed by weak oil prices and the prospects of greatly reduced dividends. Low oil prices are also putting additional pressure on an already vulnerable US HY market.

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THE OIL PRICE PLUNGE WILL RESHAPE THE ENERGY MARKET

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