Crude oil prices have plummeted towards USD 30/bbl levels and heading towards 16-year lows following the spectacular failure of OPEC and Russia to agree to production quota.
The latest developments coupled with the impact of the coronavirus (COVID-19) outbreak on shrinking global growth has prompted Saudi Arabia to aggressively slash its benchmark prices to deal with chronic overproduction in the face of global oil supply outpacing plunging oil demand.
We have hence downgraded our Brent Crude Oil forecast materially to USD 35 / bbl for 1Q20; USD 30 / bbl by 2Q20; USD 35 / bbl by 3Q20 and USD 45 / bbl 4Q20. The projected mild recovery in crude oil prices in 2H is contingent upon the COVID-19 contagion being brought under control by the middle of the year.
There are severe and wide ranging implications following this collapse in energy prices. For starters, interest rates will now stay pinned down at “Lower for Longer” with the risk of lower energy prices triggering a sharp drop in inflation expectations. Currencies of key commodities and energy exporting countries like the CAD and RUB have now come under immediate selling pressure.
There is now a spike in volatility across key asset classes with increasing scrutiny on rising credit costs in the US High Yield sector. Given the intense financial market volatility, there is now a higher probability of further coordinated monetary policy easing by G7 central banks.
Hopefully, both Saudi Arabia and Russia will be “encouraged” to return to the negotiation table to prevent further calamitous sustained slide in energy prices. There is simply little upside for both parties in this game of brinkmanship.
For more details, please refer to the Commodities Strategy, credit to UOB Global Economics and Markets Research.
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