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Will Oil Prices Ever Recover After the Market Broke?

The global economy’s most important commodity is in serious trouble. Oil prices slumped from near $50 to $20 over just 11 days in March, breaking the market’s back. The coronavirus was spreading at alarming rates and countries were going into deep freeze, crushing demand for everything from gasoline to jet fuel. April then decimated oil. Consumption slumped by a third, according to some estimates, as the world headed into deep recession. Crude was so abundant that storage tanks were overflowing. Then, the unthinkable: prices fell below zero on April 20, with sellers willing to pay buyers to take unwanted oil off their hands.

Will Oil Prices Ever Recover After the Market Broke?

May has brought some relief. The worst of the demand drop seems to be over and traffic jams are returning in China and Germany. Governments are easing confinement measures, and that’s boosting consumption. At the same time, Saudi Arabia, Russia and their OPEC friends have started unprecedented oil production curbs, easing the massive oversupply. Prices have followed, doubling since late April and topping $30 a barrel in New York on May 18. But the scale of the slump was so big that any recovery will be long and slow. Some doubt demand will ever return to levels before the crisis.

The oil market touches every corner of the global economy. Slumping prices squeezed budgets of producing countries so much that they were spurred into action in early April, after OPEC and its allies had acrimoniously ended a years-long partnership just one month earlier. President Donald Trump waded in, pressuring Saudi Arabia and Russia to end their feud and revive oil prices as thousands of U.S. jobs were threatened by companies shutting down.

That was a sign of the unusual times. America, long a believer in free markets, was suddenly entertaining the idea of voluntarily crimping its own production. Trump moved from praising cheap oil and gasoline to almost ordering global producers to help boost prices.

Oil demand is expected to contract by a record amount this year. The recovery is coming from a very low base, and the industry remains deep in the woods. The global economy is facing a historic contraction, with the U.K. heading for its worst year in more than three centuries. Airlines, one of the most battered sectors, don’t expect any quick recovery, meaning demand will continue to be low. And there’s the prospect that easing social distancing regulations will bring the virus back with a vengeance and repeat the horrors of the past couple of months.

Source: FXPro