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BHP Commentary and Outlook for Crude oil

Gasoil News - Published on Mon, 24 Feb 2020

Image Source: Crude Oil Price Forecast
Crude oil prices Brent ranged from a low of around USD 57/bbl to a high of around USD 70/bbl in the first half of financial year 2020. They were down by around 5 per cent from the average of the prior half. The front month Brent minus WTI spread was materially narrower half on half, contracting to USD 5.57/bbl from USD 8.50/bbl. The WTI minus MARS18 spread averaged around USD 2/bbl in the first half of the 2020 financial year (i.e. MARS at a premium to WTI), reflecting the impact of the tight market for sour crudes post the Venezuelan collapse and loss of Iranian barrels due to US sanctions. In calendar year 2017, in an undistorted operating environment, this spread was +USD 1.19/bbl.

In addition to traditional sources of price volatility, trade policy uncertainty has emerged as a powerful influence on investor sentiment towards oil. The Covid–19 outbreak has also impacted prices – and with good cause. We estimate that a net annual demand loss of around –0.2 Mbpd of crude will occur as a result of the outbreak: a number that could rise if our base assumption of containment within the March quarter is too sanguine.19

At the beginning of the 2019 calendar year BHP assessed that the fair value range for Brent in the coming 12 months was approximately USD 60/bbl to USD 75/bbl, USD 5 lower at both ends of the range than in the prior year. In that framework, any movement below USD 60/bbl was likely to reflect a macro sentiment discount attributable to the trade war. That turned out to be a useful starting point for assessing the development of the market. With the trade impact neutralized for now, unfortunately Covid–19 has provided an equally plausible justification for prices to languish below fundamental fair value.

Oil demand has closely followed the broader trend in economic activity, in both global and regional terms. The strong and broad–based uplift of calendar year 2017 progressively gave way to a patchy regional picture in calendar year 2018. This then led into the very unbalanced picture in calendar year 2019. Solid growth in the US and China stood in contrast to weakness in Europe and developed Asia, and a softer performance from India and other major developing regions.

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Posted By : Yogender Pancholi on Mon, 24 Feb 2020
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