Oil Price hit 20 Year low, What next?

By Eliman Dambell

When markets opened on Sunday, Oil prices hit a nearly 21 year low, as markets hit $15 per barrel. This was the first time since 1999 the market was trading at this price. The COVID-19 crisis has sent demand for the commodity to all time lows, as much of the world remains in state imposed lockdown, as the battle against the “invisible enemy” wages on. 

This lack of demand within energy markets has created a stockpile of barrels, which was one of the main factors in the recent OPEC agreement to cut production. Typically in supply and demand economics, a decrease in supply, would see demand go up. With an increase in supply seeing prices/demand go down as there is increased competition.

However this is not what we see taking place in Oil. So what is really happening?

The Issues with Oil Markets?

Demand for Oil is currently non existent as the majority of sectors which most consume the energy have been shut down. Currently the travel sector is one of the most impacted industries by the pandemic. Most nations the world over have implemented strict guidelines which mean most domestic day-to-day travel has had to be halted, only for essential and critical journeys. This has seen the roads of most cities across the world emptied, and as a result the need for Oil has suffered.

Moving away from the roads and into the sky, domestic and international travel bans meant several nations were completely closed, except for flights of repatriation. With many countries extending their lockdown in May, it could be some months away before we see air travel pick up from pre COVID-19 levels.

Agencies such as the IEA, ““Even assuming that travel restrictions are eased in the second half of the year, we expect that global oil demand in 2020 will fall by 9.3m barrels a day versus 2019, erasing almost a decade of growth,”. 

Recently OPEC+ which includes Russia met over a virtual meeting to discuss possibilities of cuts. The deal which concluded a week ago after all issues were supposedly ironed out meant that the world’s top Oil producers would cut 9.7m barrels in daily production.

Why aren’t Oil Cuts Working?

The cuts which many thought would act as a cure has so far had the opposite effect. Prices have fallen by close to $10 since last week’s agreement. Many believe that Saudi Arabia has continued to supply Oil at lower rates to Asian countries as one of the factors.

However, like stated by the IEA, supply cuts do not mean that demand will increase. With the markets running out of places to store the commodity, many feel that the effect of the recent deal may only take place when travel bans and lockdowns begin to ease up.

 

Broker discussion area