COVID19 and Oil Prices

I wrote this article for the London Financial. It appeared HERE first.

Since oil’s sharp decline back in April, prices have since recovered and somewhat stabilised. Price action has been fairly range bound with the low from the 28th February 2020 creating the upper side of the range and the 11th March 2020 high creating what appears to be the lower side of the range. I’ll have a look at the impact that COVID19 has had on price since April lows and where we could be heading over the next few months.

The main star of the show this year, without a doubt, has been the virus. As the virus eased its course and countries began to reopen, price action began to look slightly bullish with hopes that demand would eventually pick up. This being said, the impact the virus left on demand continued to be felt dramatically. Recently, with the resurgence of cases through Western Europe, countries turn to stricter restrictions with talks of potential second lockdowns, causing jitters in a market where demand outlook remains uncertain. However, I expect much of a virus resurgence fears and potential second lockdowns are already priced into markets, so a price shock is unlikely, unless a large majority of European countries lockdown unexpectedly.

OPEC and its counterparts have done much in the way of balancing the market with record supply cuts from OPEC, which cut back around 9.7 million barrels per day of production, back in April. This helped to stabilise prices and since then, OPEC has begun to taper cuts and remained fairly positive on demand outlook, dismissing concerns that peak oil demand is close. This comes despite the International Energy Agency revising their demand outlooks to downside over the last couple months. The cartel will need to continue its delicate balancing act with reports that they may be considering cancelling planned supply increases for January which could help to continue to push prices higher.

The impact the virus has had on oil prices has undoubtedly left a mark on the oil markets with OPEC working to rebalance markets. Over the next few months, it’s worth keeping an eye on how the northern hemisphere copes with the winter season, alongside whether OPEC continues to taper cuts or puts a halt to them. If OPEC decides to temporarily halt the tapering of cuts, it could help prices to recover further or, what I believe more likely, it will work to offset the demand jitters being felt in the market, helping to continue stabilising prices rather than boost them.

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