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Crude oil and the coronavirus

Market Update

Crude oil and coronavirus: from less than zero to $60 per barrel

Despite all the efforts being taken to make the world a greener place, the global economy continues to depend on fossil fuels, and on crude oil in particular. This is hardly a great surprise. It’s difficult to think of any product that doesn’t require oil or one of its derivatives in its production, packaging, or transportation.

For this reason, the price of oil is a key component in measuring the health of the global economy. The price of petrol, one of crude oil’s main derivatives, is always on display, and while this isn’t a direct comparison, it does give us a sense of the fluctuations in the oil price and feeds through to other measures of inflation.

When oil prices become breaking news

Compare this to another vitally important commodity such as copper, which is used extensively in wiring and piping and therefore arguably just as integral to modern society as oil is. Yet you only hear about copper when prices rise dramatically due to a supply shortage. But when oil prices fluctuate, we do hear about them. Consider June 2008, just ahead of the Great Recession, when the price of West Texas Intermediate (WTI) crude, one of the world’s key benchmarks, hit an all-time high of $167 per barrel. It had traded below $20 only 10 years earlier.

However, now most observers tend to pay more attention to low prices. On 20th April 2020 something extraordinary happened to the price of WTI crude oil — the price went negative for the first time in history. That meant that if you owned oil and wanted to sell it, you had to pay someone else to take it off your hands. How could that happen?


How the pandemic affected oil prices

While old-fashioned supply and demand imbalances had a role, there was a technical reason too. The economic shutdown in response to the coronavirus pandemic added to the supply glut that had been building for some time. This was putting downward pressure on the oil price anyway. On top of that, there is a crude oil futures market helping participants manage their requirements. And at the time, the ‘front month’ futures contract pricing the oil next due for delivery was approaching expiry. As there’s a cost for holding physical oil, few people wanted to take this on due to the decline in demand stemming from the collapse in economic activity. This led to a negatively priced oil contract, dropping as low as $-37.63 per barrel at one stage.

Where are oil prices now?

Since then, crude oil has rallied strongly and is currently back above $60 per barrel. Prices rose sharply following storms across southern parts of the US, which led to energy blackouts and shut down shale oil rigs and refineries. But in the medium term, oil is getting support as lockdowns ease and economic activity picks up in line with global vaccination programmes.

So, the price of crude oil is back where many analysts think it should be — high enough for the producers to profit and encourage further drilling; low enough to boost consumption while keeping a lid on inflation.

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