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Global focus remains on crude oil – UOB

Heng Koon How, CAIA, and Quek Ser Lang, Market Strategists at UOB Group, assessed the recent events in Saudi Arabia.

Key Quotes

“Our current forecast is for Brent to trade within $60 to $70 /bbl range. Market has been underpricing geopolitical risk and that risk premium has been loaded back, pushing Brent back towards $70 / bbl. Geopolitical risk premium is back in full force and near term supply uncertainties are likely to underpin Brent closer to $70 /bbl. For now, we refrain from adjusting our Brent crude oil forecast and await more clarity on how quickly Saudi Arabia can restore the lost production”.

“The premium between Brent and WTI will widen back towards $10 / bbl. WTI is a land locked crude and will continue to trade at a discount to Brent. That premium was $5.3 / bbl preceding the attack (13-Sep) and has now widened to $6.7 / bbl”.

“The Brent futures curve backwardation may intensify and this will now be a closely watched indicator on the supply crunch severity. Right now Brent for Jan 2020 is at $66 / bbl, compared to the front month contract at $68 / bbl. So we now have a $2 backwardation due to the supply drop off”.

“This is the last thing that global economy needs. We now have an energy supply crunch amidst a global growth slowdown. Airlines and transportation firms will bear the immediate brunt of higher energy prices amidst already declining traffic due to growth slowdown”.

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