Barring a major lengthy supply disruption, Brent Crude prices will average US$62 a barrel in May, lower than the current price, as the geopolitical risk premium gradually decreases in the first half of 2020, the Energy Information Administration (EIA) said on Tuesday.
Brent Crude prices were at US$64.26 early on Tuesday, down by 1.44 percent on the day, while WTI Crude traded at US$57.89, down 1.18 percent, as the market largely shrugged off a major supply disruption in Libya, where port blockades have suspended nearly all of Libya’s oil production.
Although the geopolitical risk premium this year is set to decrease from recent highs of US$70 a barrel Brent Crude, “any physical supply disruptions would put upward pressure on prices,” the EIA noted on Tuesday.
In recent months, the risk premium and the fear factor have driven oil prices higher, most notably after the attacks on Saudi Arabia’s oil facilities in September and the U.S.-Iran tensions in early January.
According to EIA’s estimates, monthly average Brent Crude prices increased from US$63 per barrel in September to US$67 a barrel in December, despite the fact that global liquid fuels inventories rose by 130,000 barrels per day (bpd) during that period.
After relatively elevated prices in early 2020, the geopolitical risk premium is set to recede over the course of the first half, and the market will be driven by fundamentals in the second half of 2020 and through 2021, the EIA said.
In its latest Short-Term Energy Outlook (STEO) in January, the EIA expects the Brent Crude spot price to average US$65 per barrel this year and US$68 a barrel next year. For WTI Crude, the EIA sees the spot price averaging US$59 in 2020 and US$62 next year. WTI Crude prices will average about US$5.50 a barrel lower than Brent Crude in 2020 and 2021—a narrower discount compared with the average US$7.35 a barrel discount last year.
By Tsvetana Paraskova for Oilprice.com
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The most pivotal factor influencing oil prices is growth in the global economy. If the recent de-escalation of the trade war gains momentum in 2020, it will stimulate global economic growth, enhance global demand for oil and accelerate the depletion of the glut in the market thus pushing oil prices up to $73-$75 in 2020.
And while geopolitical tension has subsided a bit in the aftermath of the recent US-Iranian clashes, tension is still bubbling beneath the surface and could be ignited suddenly by two potential threats.
The first is Iran’s strategy in coming days and months to force the eviction of American forces from Iraq. Losing Iraq will be a significant strategic victory for Iran. This will be eventually followed by the withdrawal of all American forces from the Middle East. The second threat is another attack by the Houthis on Saudi vital oil installations.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London