Economy needs stimulus for oil recovery
Researcher tells Arab News that dire oil market situation will continue unless US, Canada cut production
AxiTrader Global Chief Market Strategist
Saudi oil experts said that the global economy would need strong stimulus measures for oil prices to recover after a tumultuous start to the week.
It comes as US oil prices dropped into negative territory for the first time in history on Monday while Brent crude plunged by 21 percent in afternoon trade in London on Tuesday to about $20.
Saudi energy analysts said the dire headwinds facing the sector would drive a coordinated response from OPEC and non-OPEC producers. Abdullah Sultan, dean of research at King Fahd University of Petroleum and Minerals, said that transportation and mobility were among the top drivers for oil prices and that these had been significantly affected by the global lockdown. “US daily production is around 13 million barrels per day, the reserve is at a record high, the economy is slowing, the unemployment rate is increasing and global risks are unpredictable, accelerating the crash of oil prices as we saw yesterday,” he told Arab News.
“The situation is expected to continue unless the US and Canada start reducing production over the next two quarters. We are not confident enough for other oil markets to follow the US. We have a real slowdown in the global economy, and life has to go back to normal before seeing any increase in oil prices.” International oil expert Mohammed Al-Sabban told Arab News that a number of factors controlled oil prices in the short run, and the most important of these was how fast the global economy recovered. One of the key drivers for oil prices to increase was the gradual return of production in the world’s biggest industrialized nations, he said. China has already started to do this and to a lesser extent, the US, with restrictions easing in some states. Some European countries, like Germany and Spain, have allowed certain business activities and sectors to reopen and resume. Al-Sabban said it was likely that efforts by OPEC+ to slash production and the expected decrease from US and other oil-producing countries such as Canada, Brazil, and Norway would relieve some of the pressure.
“The impact of opening business and activities in the oil sector will take at least three to four months before we can see any improvement in oil prices,” he said. Khaled Al-Ageel, an oil expert and a member of the Saudi Shoura Council, told Arab News that the global oil demand and supply imbalance required the full cooperation of oil-producing countries. He warned that disagreement might lead to severe economic recession or stagnation, with a shortage of future oil supplies as a result of the implied decrease of investments in the energy sector. Al-Ageel, who has over 38 years’ experience in the oil industry, said that if production continued to exceed demand after strategic reservoirs became full, the situation would be difficult to resolve.
The logical solution was for global production to decrease to levels close to demand levels, he said. If oil-producing countries did not reach and adhere to an agreement, the crisis would continue, he added. Oil-importing countries would benefit from the decrease in prices but this would come at the expense of their production and exports because of the accompanying global economic recession.