Oil prices are inching back up after April’s slump. Big oil producers may have the resources to cope but developing markets will need help.
As lockdowns begin to ease around the world, the prospect of a slow but steady ramping up of economic activity has seen improvement in market sentiment, particularly in the beleaguered energy sector. After an unprecedented slump in oil prices in late April that saw Brent crude fall to below $20 per barrel and West Texas Intermediate briefly shift into negative territory, the worst appears to be over, as prices gradually creep back up.
Yet despite the prospect of gradually improving demand, coupled with unprecedented production cuts by Saudi Arabia and others, oil prices are set to remain subdued compared with pre-pandemic levels for some time to come. S&P Global Ratings forecasts that Brent crude will recover to an average price of $50 per barrel in 2021, increasing to $55 in 2022, compared with around $68 at the start of 2020.
That spells problems for the world’s oil-producing nations. Faced with the volatility of oil prices over the years, several countries – such as Russia, Norway and Saudi Arabia – have built economic defences to prepare for a sudden tailing off of vital state revenues, but are now facing big questions about future spending plans.
For some countries, though, the collapse in oil prices in late April – and their subsequent slow recovery – will force far-reaching economic restructuring. In mid-April, Ecuador reached an agreement with bondholders to suspend debt payments due between mid-March and August, and the country is in fresh talks with the International Monetary Fund. Nigeria, Africa’s largest oil producer, has appealed for the suspension and forgiveness of much of its debt, with Angola’s finances also looking particularly vulnerable.
Many larger producers will be able to tap the markets to help tide over their finances during the crisis. But for many emerging markets that are just beginning to develop their oil and gas industries, the impact of the crisis is likely to be devastating in the short term and beyond.
