Events and trends in politics, economics, science and even the weather cause constant fluctuations in the price of oil, as traders bet on likely levels of demand and supply in the near and far future. So how has the Coronavirus pandemic affected the global oil market?
At the beginning of 2020, the uncontrollable spread of this deadly disease led to lockdowns around the world, which brought economies to a screeching halt – in particular the aviation and road transport sectors, manufacturing and shipping – resulting in a huge oil glut and a spectacular fall in its price.
In April, when the price of oil turned negative for the first time in history, it was decided by Opec+ (the Opec member nations and their allies) that oil production would be cut, in order to prop up prices and avoid further stockpiling. Subsequently, demand forecasts improved and Opec decided in July to tentatively ease off on those cuts.
However, the mood changed again during August and September, as Coronavirus infection rates continued to rise and ‘second waves’ took hold, dampening any hope that the pandemic could be over and done with by the end of the year. Consequently, the oil price has not made a dramatic recovery. The Brent and WTI price indexes have been hovering not far off the $40 per barrel mark since the summer, almost 30% down on the beginning of the year.
Now, in mid-October, the oil price is expected to rise slightly in the last quarter of 2020, despite the fact that international travel is still in a deep slump and the world’s economies are struggling to get off their knees. The price is expected to climb no higher than the low to mid $40s until the end of the year, and could feasibly dip back down into the $30s. Opec’s most recent demand forecast for 2020 is an average of 90.2 million barrels per day, which is 9.5 million barrels per day less than its forecast a year ago.
As a result of the collapse in demand and the fall in prices, the big international oil companies such as BP and Shell have seen job losses, the streamlining of operations, asset value write-downs and dividend cuts this year. Their ongoing (pre-Coronavirus) strategy was already to reduce their reliance on fossil fuels – largely due to a growing pressure on governments to enact policies to tackle the climate emergency – and increase investment in low-carbon energy technologies (such as bio-fuels, renewables, and hydrogen capture). The pandemic has not changed this core strategy, but it has certainly accelerated its progress; how that affects the oil price in the long term remains to be seen.
The futures market is projecting a steady climb through next year, and any recovery is likely to be slow and with a lot of volatility along the way. The outcome of the US presidential election is likely to influence Brent and WTI pricing levels in November. Looking further ahead, the world’s biggest economic hopes are pinned on the safe production of a Coronavirus vaccine to speed up herd immunity in the global population. This will reduce the need for social distancing and enable industries and markets to bounce back, which will in turn probably drive up the demand for oil and therefore its price.