Abu Dhabi: Oil prices will be under continued pressure this week as production cuts by Opec+ are set to end by Tuesday, with producers expected to significantly ramp up their production, which could see prices falling down into the teens, analysts said.
Oil markets on Friday posted a fifth straight weekly loss as global shutdowns in response to COVID-19 take a heavy toll on demand. Brent closed at $24.93 (Dh91.5) with West Texas Intermediate (WTI) on $21.51.
“Saudi Arabia’s energy ministry was unequivocal about not backing down in its oil market stance. A statement from the ministry said there had been “no contacts” between Saudi Arabia and Russia, with no “discussion of a joint agreement to balance oil markets”,” said Edward Bell, commodity analyst at Emirates NBD.
“Even if there was some diplomatic breakthrough, the scale of production adjustment required would be hard to fathom. The IEA’s (International Energy Agency) secretary general estimates that with three billion people around the world in lockdown oil consumption may be declining by 20 million barrel per day,” he added.
“For reference, Saudi Arabia and Russia’s combined oil production February was 21m bpd. Oil production from OPEC and Russia would need to fall by roughly half to stop an unprecedented accumulation of inventories.”
Bell said US shale producers were now in uncharted territory, with WTI threatening to go into negative pricing.
“Oil markets have now moved into complete dysfunction with prices for physical barrels threatening to go negative. WTI priced at Midland, a production centre in Texas, closed last week at just $13 per barrel while West Canada Select, a benchmark for production in Alberta, settled barely above $5 per barrel.
“The possibility of negative prices in the physical market which we alluded to last week looks highly plausible in the current maelstrom,” he added.
UAE well positioned
Despite the current low oil prices, the UAE remains well equipped to handle the temporary shortfall according to S&P Global Rating, which maintained its AA/A-1+ stable rating for Abu Dhabi’s sovereign credit.
“Abu Dhabi’s net asset position exceeds 250 per cent of GDP, which alongside proactive policymaking comfortably cushions it from the sharp fall in oil prices and other external shocks.
“Contingent liabilities from government-related entities or other emirates, although not contractual, could materialise in a highly uncertain regional and global economic environment; yet we expect Abu Dhabi’s fiscal buffers will remain strong,” the group noted.