Oil Markets are Worsening at a Faster Pace than Ever Before…
… and the Recovery Should Usher in a New World of Petroleum
In early March, oil markets were hit by an unprecedented supply and demand shock combination. On the supply side, Russia decided to pull out of the OPEC+ agreement leading Saudi Arabia to discount prices deeply and increase output in retaliation, which drove increasing inventories. At the same time on the demand side, there was a rapid shuttering of activities in Europe and North America due to the COVID-19 pandemic, driving down demand multi-fold more than the increase in OPEC+ production. By mid-April, the United States was able to bring together Saudi Arabia and Russia to end the battle for market share and to participate with OPEC+ producers in a planned reduction in oil production. Unfortunately, this deal on production came too late to offset the world-record pace of excess supply and the rapid decline in global demand.
Oil prices have now fallen into negative territory for the first time in history as demand continues to fall faster than supply and storage capacity remains limited for inventory. The global economic recession brought about by the COVID-19 pandemic will likely slow the pace of oil’s eventual recovery but we believe the actions taken by OPEC+ (the group of OPEC members and non-OPEC members including Russia that has been trying to stabilize oil markets since 2016) and by the G20 should accelerate the oil market’s recovery before the current global economic slowdown ends. Prices will inevitably recover but once this crisis passes, we believe it will be unlikely that today’s crisis will shepherd in a new world petroleum order to manage the interdependencies of global economics and politics. When a new equilibrium does emerge in the future, it will likely reflect the forces at work long before the shock of COVID-19 set in.
It remains to be seen whether the future will be a benign low cost price arena or a higher cost politically charged one. Either way, the U.S. position in energy markets globally has brought it front and center to the ‘management’ of how the energy order will evolve.
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