April 08, 2020 / 11:23 AM / By Fitch Ratings / Header Image Credit: Fitch Ratings
Fitch Ratings has further reduced its oil price assumptions for 2020 and 2021 as the rapid spread of the coronavirus weakens the short-term global economic outlook and oil demand, resulting in very large oversupply.
The oil market is under pressure from both shrinking demand and growing supply. Much lower economic activity due to the unprecedented lockdowns in much of Europe, the US and many other countries is significantly reducing oil consumption. We expect demand to fall by several million barrels per day in 2020 compared with 2019. Jet fuel and gasoline, which represent 35% of global oil consumption, will be most affected by the lockdowns.
At the same time the OPEC+ countries' failure to agree output cuts means that OPEC members removed production quotas from April, increasing supply. Saudi Arabia, which has spare capacity of at least two million barrels per day (MMbpd), intends to maximise production. We estimate that overall OPEC production could grow by about 3MMbpd in the short term.
Falling demand is resulting in significantly larger oversupply than previously anticipated and suppressing oil prices. We now assume Brent crude to average USD35 a barrel in 2020, taking into account the average price of USD51/bbl in 1Q20 and our expectation of an average price of USD30/bbl for the rest of the year. West Texas Intermediate (WTI) prices have been adjusted assuming the Brent-WTI spread of USD3/bbl. We estimate that oil prices will bottom out in 2Q20 and expect a gradual recovery afterwards. We have cut our 2021 assumptions to USD45/bbl as oversupply will greatly increase volumes in global oil storage facilities, which will restrain price growth to a certain extent.
We expect the oil price recovery to be driven by a combination of rebounding economic activity once lockdown measures are lifted and supply adjustments due to selective production shut-ins by high-cost producers, lower investments in US shale and potential voluntary production cuts by OPEC producers.
Political factors could affect oil prices. President Donald Trump confirmed that US officials could meet their counterparts from Saudi Arabia and Russia to discuss ways to stabilise the global oil market. Saudi Arabia and Russia, the main parties to OPEC+, could eventually restart their own production cuts talks as very low oil prices negatively affect both countries' economies. However, their ability to support or raise prices in the very short term could be limited given rapidly declining demand.
We have cut our European natural gas assumptions to reflect persistently high levels of gas in European storage facilities and potentially weaker demand, both in Europe and globally, due to economic underperformance. We have kept US gas prices unchanged as domestic supply and demand remain in line with our previous expectations.
We do not anticipate that this revision of oil and gas prices will trigger portfolio-wide negative rating actions, but we will assess the credit impact on a case-by-case basis.