"Crude oil prices will be particularly dragged back by a lack of aviation demand, as international air travel is not expected to return to normal till a vaccine has been found; and that's not expected till 2021," Yan Chong Yaw, Director of Oil Research & Forecasts, Asia at Refinitiv said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: Do you think the oil demand will be back to normal in coming months given the current COVID-19-led environment?
If by normal, you mean pre-COVID-19 levels, then it wouldn't happen soon, and recovery will only be seen probably in 2021, and that is with the caveat that there are no mass second-wave outbreak.
That said, there has been some improvement in the market this month, but it must be set in the context that it is compared against April, which is probably the worst month, as countries start to emerge from lockdown but oil demand is a long way from pre-outbreak levels.
Prices are still well under $40 a barrel, versus pre-outbreak levels of above $60 a barrel; refining margins for diesel, gasoline and jet fuel have come off April's record-lows, but are still well-short of pre-outbreak levels.
Q: Will the crude oil prices (Brent crude futures) come back to $50 a barrel levels soon?
I don't see Brent going above $50 a barrel anytime soon; the earliest is probably Q4, barring any mass second-wave infections during the winter. Prices will be particularly dragged back by a lack of aviation demand, as international air travel is not expected to return to normal till a vaccine has been found; and that's not expected till 2021.
Q: Do you expect more supply cut from OPEC and allied countries and why?
The OPEC+ alliance is now considering extending output cut levels of 9.7 million bpd for May and June into July and beyond, expanding the cuts from the planned 7.7 million bpd set for July to December.
We believe that the alliance has been pleased with the way prices have stabilised, at around $35 a barrel, from April's volatility that saw Brent fall to 20-year lows of below $20 a barrel, and the US' WTI benchmark closing in negative territory.
Both the Saudi and Russian governments are reported to be in favour of extending the cuts, but the problem seems to be if the Russians can convince their oil companies to do so; and opinions seem divided there.
It is easier for the Saudis to do so because the government controls its entire oil infrastructure; but I doubt the Saudi government would extend the cuts without the consensus of the Russians. Particularly since we have seen how volatile that relationship can be, as evidenced by the break in March that sparked off the price collapse in the first place.
Q: Will the global economy contract in FY21, what is your forecast? Do you expect strong revival in FY22?
It all depends if there is a mass second-wave of COVID-19 outbreak in the winter, and how soon can a vaccine be made and mass-produced. If all goes well, with no mass second-wave infections and a vaccine is produced by end 2020, then I am hopeful that we can see some form of recovery from 2021.
Q: Do you think the upside in oil prices will be capped by US-China trade tensions? Given the US elections in November, do you think US-China relations will weaken further or is it just a politics?
US-China tensions are certainly putting a dampener on the market. I believe that the Trump administration is deliberately aggravating its relationship with China, and that the move is done with the November elections in mind, to give the American public an enemy to focus on, and to draw attention away from the shortcomings of the administration, in particular its failure to adequately respond to the COVID-19 outbreak that resulted in the US being the country with the most number of cases and the highest fatalities in the world.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.