Short Term Pain, Long Term Gain Ahead For Oil Markets And MENA Economies

The unprecedented collapse in oil prices caused by production outstripping demand will get worse before it gets better, although the long-term outlook is positive, according to Saxo Bank’s Head of Commodity Strategy, Ole Hansen.

Speaking during an online briefing hosted by Saxo Bank, Hansen said that the market may see the fall in oil prices reach its peak in the next four-to-six weeks.

“The short-term outlook for oil looks bleak, which is especially concerning for MENA economies that depend heavily on oil revenues. There is a risk of WTI Crude Oil falling back towards $0/barrel and Brent towards $10/b, but in the long term we believe the outlook is positive,” said Hansen.

The sell-off in commodities has emerged after an unprecedented collapse in demand led to oil prices falling dramatically. Amid lower demand, the world’s oil storage facilities are approaching maximum capacity, leaving producers and buyers struggling to find affordable storage facilities.

“The slowdown in demand has produced a stockpile of oil on scales never seen before. If we don’t see a dramatic increase in demand soon, the world will run out of storage facilities towards the end of May,” said Hansen. “Oil needs to be stored somewhere. You cannot extract it and not store it somewhere. There may be 20 million barrels of oil shut in over the next few weeks and when that occurs, oil prices will come under additional pressure.”

According to Hansen, the market performance of oil underlines the true economic impact of the COVID-19 outbreak. With stock markets being supported by strong performances by a few major tech companies and generous liquidity from central banks, the production-demand-storage triumvirate has seen oil struggle.

“Despite the short-term collapse in oil, the long-term outlook is positive. Demand will return when the pandemic passes, albeit with slightly lower demands than previously as business travel may reduce and companies may accept more flexible working practices in light of the COVID-19 experience showing productivity does not necessarily drop when employees work from home.”

Hansen believes the oil storage issue is central to industry’s fortunes, with survival dependent on producers accessing direct customers or storage facilities. 

“It’s a concerning situation and we’re only two or three months into it,” said Hansen. “The problem is storage. If you cannot store oil, then what do you do with it? Countries who build storage facilities may do better. It is no longer about who produces the cheapest oil, it is who can store oil they cannot sell.”

The collapse in oil prices has also led to a significant interest from retail investors looking to take advantage of the lower oil price, hoping it will recover quickly. Hansen cautioned against opportunistic oil trading during such a volatile period for markets, highlighting that Crude oil must rally 64 per cent in the next three months for popular investments in oil ETF’s to break even on investment made now.