Oil: The Immediate Past, Present and Future
Credit: Harrison Haines
Covid-19 has played a pivotal role in recent market chaos and volatility; however, no market typifies this more than oil. In April, Oil hit record low prices, sinking deep into negative rates, however whilst this was a ground-breaking occurrence, many will argue that this hardly came as a surprise.
The impact of containment measures in 187 countries and territories has been to bring mobility almost to a halt, having severe knock on effects to oil demand. Even assuming that travel restrictions are eased in the second half of the year, the IEA expect that global oil demand in 2020 will fall by 9.3 million barrels a day (mb/d) versus 2019, erasing almost a decade of growth. Therefore, even with Trump's tweets hinting at oil production cuts and therefore easing uncertainty in the market, it wasn’t enough to stop the oncoming storm.
Ultimately any cuts in oil production did very little to match the plummeting demand and soon it became abundantly clear that oil was significantly over supplied. In April, oil held in floating storage on tankers had reached at least 160 million barrels with 75 percent held in 60 super tankers. The last time floating storage reached levels close to this was in 2009, when traders stored over 100 million barrels at sea before offloading stocks.
Therefore, when we take a step back and look at the disparity between demand and supply it becomes abundantly clear why prices hit such a low. The fact that the world was running out of places to store oil in April was behind the sharp drop in the futures contract. Investors were unable or unwilling to take delivery of oil, and there were also investors who became trapped in the trade as the selling spiralled.
Following on from the April oil market crash there were dire forecasts of much more pain ahead, however remarkably we have seen somewhat of a turnaround. This has occurred due to the demand side of the market and the supply side improving in tandem, to reduce the oil glut that was close to filling all available storage facilities, including ships at sea. Recently China has been buying more oil and U.S. government data shows demand at 7.4 million barrels a day, up from the early April trough of 5.1 million barrels a day, in turn helping to recover lost demand.
On the supply side, America’s oil industry has cut its production quickly and sharply cutting back by 1.5 million barrels a day in just about six weeks, to 11.6 million barrels a day, according to the Energy Information Administration’s latest weekly data and analysts further expect production could be down by another 500,000 to 1 million barrels soon. Additionally, Saudi Arabia has added another 1 million barrels a day cut of its own to the overall OPEC plus deal for a 9.7-million-barrel reduction. As a result of this Oil is now trading above $30 for the first time since March 17, and RBOB gasoline futures have risen above $1 per gallon for the first time since March 13.
Credit: Wendy Wei
However, whilst currently the Oil market looks considerably less bleak, many argue that the future for the Oil market may not be one of complete recovery any time soon. Despite China showing signs of recovery, they still build to uncertainty due to their refusal to set a target for economic growth this year as a result of the “great uncertainty” over the coronavirus.
Additionally, in oil demand, there are warning signs that any recovery will be long and slow as the research unit of state-owned China National Petroleum Corphas stated that fuel demand in the country will drop by 5% this year. Furthermore, other world consumers of oil such as India have stated that consumption may not recover to pre-coronavirus levels for months, further showing that road to recovery is still long.
Fears of a second wave of the virus certainly casts a shadow over the immediate and the long-term future of oil. If such a second wave occurs, it would come at an even worse time as ramping up production only to be hit by further price crashes can lead to irreversible damage to the market with many firms not being able to survive. Therefore, it is likely that production won’t rise for a long time due to uncertainty and, therefore, it is unlikely that recovery is close by or even likely to ever occur.
The future of the Oil market is unclear. Whilst we seem to be on the right path to recovery, there is no telling how long it will take to get back to normal and if there will be long lasting impacts of recent occurrences.