COMMENT – Why crude oil markets may never fully recover even after the pandemic

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After a brief respite for crude oil prices on promising results from the much-anticipated Covid vaccine, the fossil fuel has resumed its downward march.

A surge in fresh virus cases and related restrictions are weighing on oil prices as the number of people who have died from covid in the US has now crossed 250,000. 

An equally grim picture in Europe as well as other parts, including the Indian capital New Delhi, is presenting fresh challenges to the world economy that seemed on the cusp of a recovery.

Crude oil and liquid fuel consumption of about 20 million barrels a day at the start of 2020 was roughly the same as 15 years ago (in the US), notes Michael McGlone, commodity strategist at Bloomberg Intelligence.

“This stagnation in US demand is unprecedented, given the rise of about 75% in nominal GDP,” he said. “A Democratic sweep might accelerate what we view as inevitable: rapidly advancing technology replacing petroleum use.”

That as a Biden administration is expected to encourage greater consumption of clean energy. Further, McGlone notes that the 20-month correlation between Brent crude oil and the MSCI stock index is at about 0.8 — roughly matching the levels in 2011-12 when Brent was in the process of peaking at $125/barrel.

Crude oil prices have declined with equities in the first quarter of 2020, but have been reluctant to recover. That despite equities have broadly advanced in the last couple of months.

The Iran factor

The International Monetary Fund has warned that the global economic recovery may be fading, with the crisis likely to leave deep, unequal scars.
The economic backdrop is presenting a challenge to the Organization of Petroleum Exporting Countries (OPEC), which is likely to find it tougher to ensure members and allies stick to their commitment for oil output cuts.

Even though the world’s most influential body on oil prices has deferred a review of production cuts scheduled for January, important members such as the UAE appear to be re-considering their position.

Under the circumstances, if Biden renews an agreement with Iran — that linked curbs on its nuclear program with conditions for allowing it to sell oil — the commodity is likely to come under fresh pressure.

It will also test the resilience  of allies and member nations of OPEC to maintain production cuts as some producers have the ability to make profits at even $20/barrel.

Currently, benchmark Brent crude oil  is trading at around $44/barrel. Analysts expect that the commodity would trade at an average price of around the same level through 2021, even if the global economy rebounds.

Therefore, crude oil faces a long and tricky road, which will likely get only tougher over the long term due to greater production of green energy.

Biman Mukherji is a columnist and consulting editor at Indoasiancommodities.com. He has worked for international news organisations such as Reuters, The Wall Street Journal as well as for newspapers like The Times of India. He can be reached at biman.mukherji@indoasiancommodities.in

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