KUALA LUMPUR: OCBC Bank expects the global economy to face a deflation if crude oil prices stay at US$30 per barrel for an extended period of time following the fallout in relations between Russia and the Organisation of the Petroleum Exporting Countries (OPEC).
Economist Howie Lee noted that crude oil prices play a crucial role in direct inflation inputs and have secondary effects on the costs of productions in almost all goods and services.
“(Crude) Oil at US$30 per barrel is almost certain to push inflation in developed countries, which are already struggling with very low inflation rates, into negative territory.
“This will have an impact on monetary policy as policymakers see the space and impetus to further loosen monetary policy as they try to keep prices from spiralling into an uncontrollable deflationary cycle,” he said in a research note today.
He said with Russia, followed by Saudi Arabia, backing out from the supply cuts, other OPEC and alliance members (OPEC+) are almost certain to follow.
The 2.1 million barrel per day (bpd) supply reduction since 2019 would return to the market almost overnight beginning April 1 as members scramble for market share.
“In the best-case scenario, a truce is called after a relatively short production war. Prices briefly plummet to US$30 per barrel in less than three months but quickly recover to above US$50 as Russia and Saudi Arabia call for a truce and supply across OPEC+ is once again reduced by 2 million bpd and this coincides with a possible subsiding of coronavirus concerns,” he said.
However, if Russia and Saudi Arabia flood the market with crude oil while the coronavirus situation takes longer than expected to abate, prices could remain around US$30 for more than a year, he warned.
Lee said there would be implications for the oil and gas sector, and in the worst-case scenario oil exploration projects would go belly-up as it becomes unprofitable to conduct oil exploration at such depressed prices.
He said many oil and gas companies are expected to go into bankruptcy or receivership and defaults on loans are expected, not unlike what was observed in 2015.
He added that US shale producers, which reportedly have one of the highest marginal costs of production, would exit the market, resulting in the US having a lower share in the oil market. – March 9, 2020, Bernama
