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A weak global economy will keep pushing oil prices down: Geoff Dennis – Economic Times

On the basis of the rise in oil prices, can one safely say that economic balance is returning to the global economy?
Well, that is perhaps taking it a little too far. There is a certain sense of balance being restored. I argued several weeks ago that you had the worst of all worlds for oil which is that there was a collapse in demand because the global economy stalled due to coronavirus. There was a supply glut as well because of the fight between Russia and Saudi Arabia.

And what I said at the time was you can fix the supply side any time as the countries get back to the table. Hopefully, that is what is happening now although I am not sure that President Trump necessarily has an inside track of when and how that is going to happen. But what oil is reacting to is the hope that this supply glut will be eased and that is pushing oil back to a more reasonable level which is still dealing with an incredibly weak global economy with incredibly weak global demand for oil. Oil is a good indicator of what the global economy is doing.

Do you see the oil prices bottoming out now? Have we moved past the $20 per barrel level or do you believe that all is dependent on how those stocks fructify and if at all the US agrees to cut its own output?
The chances of an oil supply cut by the US is probably pretty small and US oil companies are prevented from working by law with an outside grouping like Opec. You could get some informal agreement to cut output from the US. That is a possibility but I suspect you are probably past the bottom.

But the volatility in oil prices will continue because the main driver from here — assuming that there is some attempt to deal with the supply glut by OPEC, by Saudi Arabia and by Russia — is going to be the softness in the global economy. The global economy is going to get much weaker than even what it is today. But we also expect that a certain amount has been priced in. But the actual demand for oil is going to fall very sharply this year.

Everybody knows that and it does mean that the risk of another push down towards $20 a barrel of Brent is possible. If it were to happen, it is going to happen because of a demand shift. Probably these countries will get the supply side back in order relatively quickly.

A lot of analysts are of the opinion that the producers are highly sceptical that the producers can commit to large cuts at this point of time. What is your own view on that and could the oil prices be under pressure once again?
Yes, they will know better than I will. But large output cuts may not be all that feasible. There is often a situation at times of soft demand where countries want to maintain their output as best as possible in order to maintain revenues. This of course, is why we economists always say cuts ultimately fail because everybody is interested in breaking the cartel, breaking the agreements.

The point we are looking for the oil price now is to avoid the glut which has happened because Saudis have ramped up production as Russia would not agree to a cut. This is exactly what Saudi also did in 2014 when oil prices fell sharply.

We have to compare this move with what happened in the second half of 2008 when oil prices fell by over 70% as the global financial crisis hit, albeit from much higher levels than they were a few weeks ago. From here on, there is not a lot that can be done by supply cuts to really push the price higher by a significant amount.

What is going to matter is what the global economy does because if the global economy remains weak for a sustained period of time which I think it probably will, that is going to run the risk of pushing the oil prices back down again.