World crude prices have staged a modest recovery from last month's dizzying collapse, prompting analysts to wonder whether the worst of the 2020 oil crisis is over.
The commodity tanked for the first time into negative territory in April, plagued by demand-destroying coronavirus, chronic oversupply and a Saudi-Russian price war.
West Texas Intermediate crude hit a historic low of minus $40.32 per barrel on April 20 as sellers were forced to pay to offload the May contract amid scarce storage capacity.
Brent North Sea oil then dived as low as $15.98 on April 22 but did not turn negative. Fast forward one month, however, and both oil prices are currently trading at around $35 per barrel.
Phoenix from ashes?
“Like a phoenix from the ashes... oil prices have recovered significantly from their lows in April,” said Commerzbank analyst Eugen Weinberg.
Behind the recovery is an easing global supply glut, and nations beginning to relax lockdown restrictions that have crippled oil-intensive sectors like transport and manufacturing. Yet some analysts warn that the market remains vulnerable to a much-feared second wave of coronavirus infections, and subsequent lockdowns. The deadly pandemic has so far killed 328,000 people worldwide and infected more than five million.
“What about the bottom in oil prices: is it behind us or ahead of us?” asked Rystad Energy analyst Bjornar Tonhaugen. “After the latest shut-ins and the news that more production will be cut in the Middle East, we now see an increased possibility that prices have already reached the bottom, unless a second lockdown wave comes.”
Prices went into freefall in April as the deadly COVID-19 outbreak slammed the brakes on the world economy and sent energy demand off a cliff.
At the height of the market meltdown, the world was awash with crude, with storage stretched almost to full capacity both onshore and offshore.
The likely shape of the revival has been a hotly contested topic. A V-shape was discarded a while ago. It’s possible it could be U-shaped, with a relatively long period along bottom, or L-shaped, with demand never returning to where it once was.
Certainly, airlines don’t expect a return to the 2019 level of demand for years to come. It’s what Ed Morse, a veteran oil watcher at Citigroup Inc. calls “the winding, bumpy road to an oil recovery.”
The sheer scale of the demand destruction, about 30 million barrels a day in April, means the comeback is going to be a painful process. The International Energy Agency estimates that consumption will be down 25.8 million barrels a day in May, and 14.6 million in June. In December, it would still be 2.7 million a day below 2019 levels.
“We’re seeing improvements really across all three markets, we’ve seen in May volumes trending up in Europe, we see that happening in the U.S., and we see that also in Asia,” Darren Woods, CEO of Exxon Mobil Corp. has said. “There are some, I’d say, encouraging early signs.”
The very gradual improvement comes just as producers, from the OPEC+ alliance to drillers in Texas, accelerate their output cuts. Together they could progressively push supply and demand into balance over time. In the past week, more companies, including big American firms such as ConocoPhillips, have announced fresh production closures.
“Globally, we are at the inflection point where we are past the worst for oil demand destruction but not for supply destruction,” Olivier Jakob, managing director at consultant Petromatrix GmbH. “This should help price stabilization.”
The process will take time, with unsold crude and oil products likely to accumulate well into June and perhaps even July. Storage tanks are nearly full, and that brings with it the risk of New York crude gyrating wildly again when the June futures near expiry in the middle of this month, mirroring what happened when the May contract ended and sent prices below zero.
Even so, the physical oil market, where actual barrels change hands, is showing tentative signs of recovery, particularly in Europe. Urals, Russia’s flagship export grade, has risen to a premium over Brent after Moscow cut exports to a 10-year low.
Rebalancing
In an attempt to defend oil prices and rebalance the oil market, the OPEC+ alliance of major producers led by Riyadh and Moscow agreed to slash daily crude production by 9.7 million bpd over two months.
The United States, which is the world's biggest oil producer, has meanwhile curbed the pace of costly shale oil extraction, which is unprofitable in times of ultra-low prices.
“Oil demand has bottomed out and oil supply from OPEC+ and North America is falling sharply,” added Weinberg. “The oil market is thus no longer as oversupplied as feared.”
“Rising demand and the massive production cuts are likely to cause a considerable supply deficit in the second half of the year. The sharply increased inventories should then fall noticeably,” he added.
The IEA has forecast that global oil demand will fall by a record amount this year on coronavirus, but also added that the worst may well now be over. OPEC predicted that the rebalancing of the oil market would accelerate over the next few quarters.
The U.S. Energy Information Administration forecasts a complete recovery of global oil consumption by Q4 2020 despite the massive dip in Q2 and Q3. This is accompanied by a modest decrease in overall production compared to Q1 2020 levels.
But long-term structural changes in energy consumption such as the expansion of shale technology and decline of shale E&P costs, the growth of renewable energy, worldwide access to electric automobiles, etc. will likely keep a ceiling on the future of prices.
It is unlikely for the price of oil to get back to the $70-$80 territory unless there is a massive growth in demand from emerging economies. More realistically, oil prices climb back towards $30-$35 dollars per barrel by December, and from there track the progress of the global recovery.
Such prices are hardly good news for the future of the majority of U.S. shale oil and gas producers, who account for some 8% of the nation’s gross domestic product and contribute some 10 million well-paying jobs.
However, the lesson of the 2014 oil price plunge was that the producers were able to restructure and prioritize their operations in a way that created a more resilient oil market.
"Oil demand is on the path to a gradual-but-fragile recovery," said PVM analyst Stephen Brennock.
