Westpac: Fears of the growing epidemic are hitting crude oil, but oil quantities are more powerful

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Focus shifts from a Chinese epidemic to a global epidemic

As February ended, the focus on the COVID-19 outbreak shifted from China to the rest of the world. In particular, markets have shifted attention to the rapidly spreading outbreak in Italy and the early stages of the outbreak in the United States, and the disruptions that would lead to the European and American economies. This has resulted in very mixed movements in commodities with crude oil being the main commodity at risk as industrial economies are declining while base metals, iron ore and coal remain supported by supply factors and better demand outlook.

Westpac lowered its near-term forecast for Brent to $30/bbl in the March quarter and lowered the year-end number to $50/bbl from $55/bbl (currently $47). The crash of crude oil spilled over to our LNG forecast with a new low of $4.1/mmbtu in the June quarter and a revised 5.4 mmbtu by the end of the year from $8.2/mmbtu (currently $8.47/mmbtu). We are keeping our year end for iron ore at $65/ton (currently about $90/ton) but raising the corresponding Qld coal forecast to $130/ton from $125/ton (currently $146/ton). Gold stands out in a high-risk environment and we raised our year-end target to $1,600/oz from $1,461/oz.

Crude had a huge demand shock and then Russia and Saudi Arabia came along

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Westpac: Fears of the growing epidemic are hitting crude oil, but oil quantities are more powerful

Just this week, OPEC+ negotiations stalled when Russia refused to cut crude oil production in response to the demand-driven COVID-19 crash. In response, Saudi Arabia slashed its export prices, a major psychological blow to the market that pushed Brent down to $36/barrel. The market now faces the specter of unrestricted production once the current OPEC+ agreement expires in March.

Given weak demand and the possibility of this weakness continuing into the second quarter, low-cost producers may be keen to raise volumes to offset lower prices and preserve income. However, it will be difficult for many of them outside of Saudi Arabia to increase production meaningfully once the production deal is over. However, there is still a significant downside risk to prices from a lack of a production deal, as even a flat volume will be negative for prices in a subdued demand environment.

If global economic growth weakens more than expected and crude demand contracts more sharply than expected prices could fall more easily than expected. That's why we set below $30/bbl at the end of the first quarter, with clearly lower risk prices, ahead of US and OPEC+ production cuts in the second half of the year, as well as a modest recovery from COVID-19, raising Prices to $50/barrel at the end of the year. Westpac: Fears of the growing epidemic are hitting crude oil, but oil quantities are more powerful

Excess production and weak demand affected the decline in LNG prices.

The dramatic decline in Chinese economic activity on top of the fragile oil market has hit the already weak global LNG market hard. The collapse in crude oil prices, and Chinese demand for LNG, has significant implications for our LNG outlook, as this demand loss comes just as we witness a significantly oversupplied market. In December China was briefly the largest importer of liquefied natural gas, overtaking Japan, highlighting exposure to virus turmoil. We have lowered our near-term forecast to $4.1/q in the June quarter due to increased LNG abundance and lower natural gas prices in the US.

Westpac: Fears of the growing epidemic are hitting crude oil, but oil quantities are more powerful


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