Four weeks into the oil price collapse, US President Donald Trump has hinted at an imminent production cut among OPEC+ members, but we remain skeptical much will change before later this spring. In our opinion, we have yet to see the full extent of the ramifications of this macro shock on the global economy, financial markets and geopolitics. In the short term, downside risks apply to oil prices and emerging market (EM) bonds.
Notably, this is an unprecedented oil price shock with virtually no beneficiaries. Movements in the oil price typically generate a wealth transfer from producers to consumers or vice versa and are relatively speaking macroeconomically balanced from a global perspective. However, in this instance, the collapse in producer revenue is not matched by consumer gains as the public health measures restrict an increase in (or simply maintenance of) consumption. We forecast a record-breaking oversupply in Q2-Q3 of this year, and that includes relatively optimistic assumptions around the gradual lifting of lockdowns by early May (Figure 1). The rapid dissolution of this oversupply by spring 2021 assumes that as demand recovery sets in, supply cuts become accelerated.