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Heres Why Oil Prices Will Never Recover

Last month when oil prices fell to the horrifying low of -$42 per barrel, investors started to worry about looming oversupply issues. Simply put, the world is running out of places to store the stuff as coronavirus lockdowns weigh on demand.

But this week we saw prices start to rise, and Donald Trump was quick to applaud the move upward. The end of lockdowns, he said, will bring back oil demand.

That’s true, to a degree, but it doesn’t paint a complete picture of the oil industry on the other side of coronavirus. Reopening economies will indeed increase the demand for oil, but whether or not it will be enough to offset the supply glut is debatable. A report from the International Energy Agency shows that demand for oil in 2020 is all but lost due to coronavirus lockdowns. In April, when most of the world was stuck inside, oil demand is expected to have come in 29 million barrels per day lower than where it was in 2019.

Even if most nations come out of quarantine in the summer, demand for oil in December is expected to fall by 2.7 million barrels per day from the previous year.

Notably, the grim report assumes that lockdowns are eased. It doesn’t factor in the potential of a second wave and renewed lockdowns. Investors have been quick to bid up oil as economies around the world reopen. Still, they might not be accounting for the dramatic shift in consumer behavior in a post-coronavirus world. Most importantly is the resumption of airline travel. In the absence of a coronavirus vaccine, international travel is likely to be extremely limited.

That’s true not only because high unemployment rates and uncertainty will cause people to save their money rather than spend on a vacation, but also because it’s going to be challenging to ensure that airline travel will be safe. In China, where the government has been gradually easing lockdown measures for the past month, airline travel appears to have plateaued without showing signs of a rapid recovery.

Plus, the supply concerns that took oil prices below $0 in April still exist. The supply cut that producers agreed to last month isn’t large enough to offset demand weakness through the summer as travel plans are canceled. According to Goldman Sachs, production cuts of 18 million barrels per day are necessary to balance out supply and demand. That is almost twice as much as OPEC agreed to cut in April. Goldman believes that oil storage could be wholly maxed out in just three weeks.

Here’s Why Oil Prices Will Never Recover, CCN, May 6

Source: FXPro