ROME, April 22. /TASS/. Oil prices will continue falling amid the declining global demand due to the crisis triggered by the coronavirus pandemic, Head of the Energy, Climate and Resources Program at the International Affairs Institute Luca Franza told TASS on Wednesday when commenting on the recent collapses on the oil market, adding that the oil demand is not expected to return to the pre-crisis level earlier than the end of 2024.
"The price collapse was mostly demand-driven rather than supply-driven. The agreement (between Russia and Saudi Arabia on crude production cuts - TASS) foresees a coordinated production cut of 9.7 mln barrels per day, but the announced cut is actually only drop in the ocean, it’s not going to be enough to drive up prices significantly even after 1 May! In the meantime, there will be a lot of stocking and prices will keep on being very low," he said.
"Usually oil demand would respond to low oil prices, by going up again after a while. But this is not happening this time because the fall has been triggered by a major exogenous event and we expect a very slow recovery. According to many scenarios, not the orthodox IMF view which is very arguable, the Eurozone will only go back to pre-crisis GDP levels in Q4 2024," the expert added. He shares the view that the current demand decline is going to be "one of the largest downturns in history."
Franza expects shale companies to go bankrupt in the US as a result of those processes. "One scenario is that only small companies go bankrupt in this phase, and there are mergers and acquisitions. Another scenario, more dramatic, can take place when there are more important bankruptcies: not only of some large or mid-cap oil and gas companies, but also of the financial institutions that backed them, which might trigger a wider economic downturn with domino effects," he explained.
Shale production will partly recover when prices rise, the expert said, adding though that the recovery will be slow. "Wall Street is not enthusiastic about backing shale producers anymore because it lost a lot; shale developers now know that their success depends on OPEC and Russia helping to support the price," he noted.
OPEC+ countries finalized the deal on crude output production in May-June at an extraordinary meeting on April 12. The final reduction quota for two months will equal 9.7 mln barrels per day instead of 10 mln barrels per day as Mexico assumed a smaller quota than expected. Russia and Saudi Arabia will reduce production on equal terms by 2.5 mln barrels per day from the basic level of 11 mln barrels per day.
The agreement itself will remain in force for two years, though already 7.7 mln barrels per day will be slashed in the period from July to December 2020, and 5.8 mln barrels per day from January 2021 to end-April 2022. The parameters of the deal may be reconsidered in December 2021.