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Business News Mon, 29 Jun 2020

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IES analysts back cut to oil price assumption in mid-year budget review

Despite the recent increases in oil prices on the international market, policy think tank Institute of Energy Security (IES) has predicted that the oil market is not likely to see a V-shaped price recovery any time soon.

Since falling to record lows in March and April, Brent crude oil prices have experienced some gains following the easing of coronavirus-induced restrictions around the world. Prices stayed near US$40 per barrel at the end of last week.

However, analysts at IES told Business24 in an interview that it is difficult to tell whether the trend would continue in the months ahead.

“Any forecast of oil demand and price getting to the pre-COVID-19 levels before end-year could be distorted by some prevailing market happenings, posing as risks which cast shadows over the immediate recovery of the oil industry. These include a possible second wave of infections, increasing stock levels, delayed full economic recovery, return of shale production, political tension between the US and China, and the coming of the summer,” the analysts said.

“Also, there are still hundreds of millions barrels of crude and petroleum products being held in storage tanks around the world, making it difficult for OPEC+ production cuts to have any meaningful impact on prices.”

According to the energy sector analysts, compounding the situation is the vast amount of natural gas held in storage due to the milder winter, adding that as summer draws closer, natural gas storages are likely to get fuller due to fall in demand and the introduction of new supplies.

Again, the IES said there are currently over 2.2m barrels of U.S. production shut-in, waiting to be re-opened when oil price draws closer to US$45 per barrel.

“One must also not lose sight of the fact that the extent to which the current crisis has destroyed the global economy is much greater than the 2008/2009 crisis. As a result, a full recovery may be delayed for a while,” the IES added.

On the back of these factors, the Institute said the government must be measured in its crude oil price assumption going into the second half of the year 2020.

In March, the government said it was now working with an oil price assumption of US$40 per barrel, significantly below its original 2020 budget projection of US$62.6 per barrel. This would lead to a revenue shortfall of around US$1bn this year, Finance Minister Ken Ofori-Atta said.

Industry watchers including Fitch Solutions and Bloomberg see oil averaging US$40 per barrel this year, with chances of further increases in 2021.

Mr. Ofori Atta is expected to present the mid-year budget review and supplementary estimates for the financial year in July.

In April this year, Parliament granted a request by the Minister to withdraw an amount of GH?1.2bn, equivalent to US$219m, from the oil stabilisation fund to finance the Coronavirus Alleviation Programme (CAP).

The Finance Minister is expected to use the budget review to explain how the government intends to replenish the stabilisation fund.

Data from the Ghana Statistical Service earlier this month revealed that the country’s economy grew 4.9 percent year-on-year in the first quarter of 2020 compared with 6.7 percent in the same period last year.

Source: thebusiness24online.net

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