KUALA LUMPUR (June 22): Brent crude oil price is anticipated to return to US$50/bbl by year end, according to OCBC Treasury Research, in light of an expected supply deficit as that will occur from as early as October.

Prices are expected to be capped at US$50/bbl, however, considering the huge stock build-up during the Covid-19 pandemic, it said in a research note. At the time of writing, the benchmark Brent stood at US$42.10/bbl.

"After a dreadful 1H20, we expect Brent to increase to US$50/bbl by end-2020, but the upward trajectory will not be smooth,” it said.

“We see the potential for short-term corrections each time the one- to twelve-month contango spreads narrow to less than US$2/bbl.

“The heavy stock overhang should prevent headwinds from oil rallying past the US$50/bbl level, but even at that level, prices would have more than doubled from its low during the oil collapse in March,” it added.

OCBC Treasury Research estimates that the crude oil market may return to a supply deficit by October 2020, and may experience a sharp supply deficit in the late fourth quarter of the year (4Q20) of almost 1 million bpd, if OPEC+ keeps to its current output reduction schedule.

However, crude oil inventories in the US are now at a record high, and inventories in OECD are 50% higher compared to pre-Covid-19 levels, it said.

“While there is no official data on crude oil stocks in China, we estimate that China had also been stockpiling crude oil since the start of the year, given how its refinery throughput numbers have failed to keep up with its robust import figures,” it added.

Overall, the research house is expecting Brent crude oil prices to hit US$46/bbl in 3Q20 before climbing further to US$50/bbl by year end, for an average of US$39/bbl for the whole of 2020.

For 2021, the forecast is for the benchmark to average at US$44/bbl for the whole year, with an initial dip to the US$47/bbl-range in 1Q20 before rising to US$52/bbl in 2H21.

Meanwhile, the West Texas Intermediate benchmark is seen hitting US$47/bbl by the end of 2020, with a full-year average of US$35/bbl, and to climb to US$52/bbl by end-2021 with an average of US$44/bbl.

However, little respite is seen for natural gas, which is expected to average at US$1.81/mmbtu in 2020 and US$2.13/mmbtu in 2021.

For oil, an unspoken downside risk is Libya’s potential return to the market, which could impact the supply dynamics, according to OCBC Treasury Research.

Oilfields in Libya have seen trouble restarting production as recently as this month, following months of shutdown due to the ongoing feud between the Government of National Accord and the Libyan National Army.

“The African crude oil producer has seen its production fall 1.2 million bpd to less than 0.1 million bpd over the ensuing civil war.

“Should this 1.2 million bpd return to pipelines, the oil market would easily flip back into a supply surplus,” OCBC Treasury Research said.

Crude oil prices have seen support at the US$40/bbl range since June, amid the production cut agreement by OPEC+.