Traders bidding up oil prices are missing one crucial fact: Demand for the black commodity cannot return to normal even after COVID-19 has passed. | Image: AP Photo/Nabil al-Jurani, File
- This rally can only go so far as supply concerns threaten to sink oil prices once again.
- Even as economies reopen, demand for oil will remain depressed.
- The OPEC+ cuts weren’t enough to offset weak demand.
Last month when oil prices fell to the horrifying low of -$42 per barrel, investors started to worry about looming oversupply issues. Simply put, the world is running out of places to store the stuff as coronavirus lockdowns weigh on demand.
But this week we saw prices start to rise, and Donald Trump was quick to applaud the move upward. The end of lockdowns, he said, will bring back oil demand.
Donald Trump is pumping the oil price recovery on Twitter. |Source: Twitter
That’s true, to a degree, but it doesn’t paint a complete picture of the oil industry on the other side of coronavirus. Reopening economies will indeed increase the demand for oil, but whether or not it will be enough to offset the supply glut is debatable.
Oil Prices Will Reach a Ceiling
A report from the International Energy Agency shows that demand for oil ni 2020 is all but lost due to coronavirus lockdowns. In April, when most of the world was stuck inside, oil demand is expected to have come in 29 million barrels per day lower than where it was in 2019.
Even if most nations come out of quarantine in the summer, demand for oil in December is expected to fall by 2.7 million barrels per day from the previous year.
Weak demand for oil will persist all year. | Source: IEA
Notably, the grim report assumes that lockdowns are eased. It doesn’t factor in the potential of a second wave and renewed lockdowns.
Travel Won’t Bounce Back
Investors have been quick to bid up oil as economies around the world reopen. Still, they might not be accounting for the dramatic shift in consumer behavior in a post-coronavirus world. Most importantly is the resumption of airline travel. In the absence of a coronavirus vaccine, international travel is likely to be extremely limited.
That’s true not only because high unemployment rates and uncertainty will cause people to save their money rather than spend on a vacation, but also because it’s going to be challenging to ensure that airline travel will be safe.
In China, airline travel has seen a modest recovery. | Source: IEA
In China, where the government has been gradually easing lockdown measures for the past month, airline travel appears to have plateaued without showing signs of a rapid recovery.
Investors Too Optimistic About Oil Prices
UBS’s Giovanni Staunovo warned that the supply imbalance has the potential to send crude prices plummeting once again in the weeks ahead:
Many market participants believe there is light at the end of the tunnel. But while the inflection point appears near, we would describe the current environment as the darkest hour just before the dawn. With oil inventories still increasing, crude oil prices remain vulnerable to renewed setbacks.
A similar sentiment was echoed by Royal Dutch Shell’s CEO Ben van Beurden, who cautioned the energy company is worried that demand may never return:
We are looking at a major demand destruction. We don’t even know that will come back.
A lot is expected to change about the world post-pandemic—with sectors like retail and restaurants likely to exit the crisis transformed forever.
The oil industry is facing a similar situation. Now that most companies have worked out a way for their employees to work remotely, or at least conduct meetings remotely, travel in general will decline. That’s a chunk of demand that will likely never come back.
Supply Issues Persist
Plus, the supply concerns that took oil prices below $0 in April still exist. The supply cut that producers agreed to last month isn’t large enough to offset demand weakness through the summer as travel plans are canceled.
According to Goldman Sachs, production cuts of 18 million barrels per day are necessary to balance out supply and demand. That is almost twice as much as OPEC+ agreed to cut in April. Goldman believes that oil storage could be wholly maxed out in just three weeks.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.