Oil Prices Expected to Drop below $40 Due to Second Wave of Coronavirus

Brent oil prices lost almost 15% from the start of fall and dropped below $40 per barrel in early October. Prices are driven by the epidemiological recurrence, prompting countries across the globe to reinstate lockdown measures to a certain degree, experts questioned by TASS say.

Nevertheless, the spring scenario with oil prices falling below $25 per barrel is unlikely, analysts say. This is owing to several reasons, including the strong reduction of oil production globally. China, the strongest trigger for demand plummeting, does not demonstrate an increase in the sickness rate now, Alexei Kalachev from Finam says.

“The factor of China will not work now, even considering imports slowdown. They managed to procure oil during the low prices period,” the analyst says.

“If the scenario of abrupt demand and prices drop is implemented, OPEC+ will be able to respond quicker and adjust supplies. Therefore, such a collapse as in March – April will probably be managed to be avoided, even if the epidemiological situation continues worsening,” Dmitry Marinchenko from Fitch says. “Large-scale lockdowns will be probably avoided this time because governments will endeavor to use pinpoint measures,” he added.

“Crude oil remains challenged by weaker fundamentals as the COVID-19 pandemic continues to slow the recovery in demand, while at the same time OPEC+ is struggling to keep production down following the resumption of exports from Libya. Overall however oil is doing reasonably well and probably could have traded somewhat lower if it wasn’t for the support coming from a continued slowdown in US oil production,” Ole Hansen from Saxo Bank says.

Oil and gas executives said they needed the price of $50 per barrel or higher on WTI before considering increasing the number of oil rigs in a recent survey carried out by the Dallas Federal Reserve Bank, Hansen noted. “With the price well below that level we suspect that US production could weaken further over the coming months. Adding to this the risk of OPEC+ surprising the market with new initiatives to support the price of oil,” the analyst said.

Saxo Bank expects Brent oil will be traded in the fourth quarter of 2020 within the range of $38 to $48 per barrel. The oil price may drop even to $36 a barrel, Kalachev from Finam noted. Experts do not expect the demand and prices recovery earlier than 2021 or 2022.

“Oil prices are going to remain low until a vaccine is made widely available, something that may easily take another 12 months. On that basis a meaningful recovery in the price of oil and demand may not occur until last 2021 or into 2022,” Ole Hansen added.