On 20 April, the price of US oil benchmark West Texas Intermediate (WTI) crashed from $17.85 to -$37.63, marking the historic moment where oil prices went negative for the first time. This was overwhelmingly due to two factors. The most obvious was and continues to be the widespread effects economies being shut down as a result of the COVID-19 pandemic, effectively tanking oil demand as factories shut down, planes remain grounded and traffic on roads disappears.
The second was a price war between Saudi Arabia and Russia, instigated by the former over the latter’s refusal to reduce their oil production to keep prices at a moderate level.
The momentous price drop came off the growing tension between two of the biggest global oil producers, Russia and Saudi Arabia, over market share. This tension reached its boiling point on the 6 March OPEC summit where Russia refused to take on the burden of cutting oil production, which led to oil prices going below $20 by the end of the month.
The 9 April OPEC meeting saw the two energy giants finally come to an agreement, as the organisation and its allies decided on reducing the production of oil barrels by 9.7 million. However, this did not stop oil prices from plummeting further, reaching their lowest on the 20th day of the same month, when oil fell to negative levels as traders were stuck with an overabundance of supply with increasingly little space for storage. In other words, for a few days, oil as a commodity became a liability instead of an asset.
25 million barrels per day, or about a quarter of global oil demand, was estimated to have been unused in April because of the coronavirus.
May Recovery
After the greatest fall in oil prices in April, the commodity bounced back in May with record increases. WTI surged up to 88% by the end of the month, making it the biggest monthly increase in history. WTI’s Northwestern Europe counterpart Brent crude had its price rise up by 40%, its largest monthly recovery since March 1999.
The increase in oil prices was a result of production falling and demand slowly but surely rising, thanks in part to anticipation over countries beginning to relax travel restrictions and to reopen businesses.
While optimism over the commodity’s huge price rebound is welcome, it is not necessarily a sign of a healthy market. Even with the nearly 90% price increase for WTI, it is still 46% lower than the monthly high of $65.65 per barrel at the start of the year. Overall oil prices are also still down by nearly 41% for the year.
In their Global Energy Review 2020, the International Energy Agency (IEA) estimated the oil demand for the latter half of 2020 to be 6.5 million barrels per day (bpd), which is 30% below its projections of 9.3 million bpd for the year. This would be a 6% drop from last year’s demand. This latest forecast is also dependent on global lockdowns easing up and a strong economic recovery.
A third of the reduction in oil demand across the globe is attributed to lower petrol use. The IEAa also expects global petrol consumption to decline by 11% for the entire year, amounting to 2.9 million bpd.
Future Uncertainty
Heading through June, prospects for the continued recovery of oil prices have been shaky due to a number of factors.
The US and UK have criticised China’s recent plans on enacting a law that would criminalise dissent in Hong Kong over Beijing’s authority. The Trump administration responded to the move by announcing to remove special trade exemptions from Hong Kong, all the while committing to its phase one trade deal with China. This continues to exacerbate relations between the two superpowers.
OPEC moved their proposed meeting from 9-10 June to 4 June, with plans to extend its current production cuts for one to three more months and limiting the cuts to 7.7 million bpd.
Political, economic, and social turbulence and their accompanying risks have all dampened the outlook on global oil price recovery. Factor into that fears of a second wave of coronavirus in countries across the world, and you have very uncertain foundations for the recovery of the global economy and along with it oil prices.
The recent downturn in expectations follows the oil market in contango back in March (contango is when future prices for a commodity are set higher than current or “spot” prices). Typically, future prices are lower, netting discounts for those willing to risk buying oil when production is not set in stone. Future prices for oil also went over $10 for the first time since 2009 when the global financial crisis reached its peak.
Past the Pandemic
The IEA stated in their report that the energy sector may look significantly different after COVID-19, citing the historic low prices and low demand that would leave businesses financially vulnerable. Market experts are hard-pressed to see oil return to its pre-pandemic prices even as far along as June 2022.
Businesses and employees the world over are learning that telecommuting setups for various positions are manageable, which could lead to a greater decline in commuting and business trips post-coronavirus.
The spotlight is now on renewable energy. In the UK and EU, the share of renewable energy in total electricity generation grew to 43% from the 10 March to 10 April period. In Germany, the figure was at 60% for renewable energy. With global carbon emissions dropping by 8% as governments responded to COVID-19, the transition to clean energy to support economies moving forward is becoming ever clearer.
The novel coronavirus pandemic is still a developing story, with fears over a second wave hitting South Korea, Japan and China, so there are no concrete answers yet to the questions of if and when oil prices will recover. The best we can do for now is to prepare for future hardships, work with key industry partners to weather the storm in Oil & Gas and look to the future potential of renewable energy.
