Much like some of the most daunting roller coasters in the world, crude oil has provided adrenaline building hill climbs, steep drops, twists, and turns. Historically, you will be hard pressed to find a more erratic fuel market than the one we have witnessed over the past few months. COVID-19 has sparked drastic demand destruction, the warm winter months have curtailed heating oil demand, wet seasons are delaying farming, and OPEC+ cannot seem to agree on the production levels of crude to help negate the excessive supply on a global scale.
The hill climb:
In early January, everyone witnessed crude oil settle in the low-to-mid $60/barrel range and discussing how the proposed cuts at the time could possibly drive oil to $70/barrel. At first glance, it seemed that OPEC+ was in agreement through the end of 2019 and into the first few days of 2020. The industry surely seemed healthy at that point in time. But at the end of every rollercoaster hill climb, comes the abrupt drop off at blistering speeds.
The steep drop:
COVID-19 rears its head in January of 2020! This starts the historical demand destruction shortly into the new year. Originating in China, the virus quickly spread to major travel hubs throughout the globe. So quickly, that the FDA is prioritizing the fast track development of clinical trials. Since the virus has been visible to the world, there are over 1.3 million confirmed cases, with nearly 80,000 deaths as a result.
The twist and turns:
As if the COVID-19 pandemic was not enough to drive the markets into a freefall, tensions between Russia and Saudi Arabia have helped escalate the excitement of this crude rollercoaster ride. Russia and Saudi Arabia have gone away from the global direction of production cuts, in order to impose a financial strain on each other and also assert themselves as leader among the global oil producers. With each country churning out more and more oil, paired with demand destruction of COVID-19, there is a lack of physical storage capacity which is causing a substantial drop in prices. Neither nation will seemingly abide by the proposed cuts without the assurance the other nation will also agree to production cuts. President Trump has recently vocalized 10 million barrel per day cuts, but the global demand is estimated to be down 30-35 million barrels per day. This would seemingly only slow the inevitable of running out of oil storage capacity.
The bumpy straightaways:
There is talk of a G-20 meeting on Friday to discuss the future of the global markets. With this short-term date in mind, all we can do is wait out the rest of the week and wait to hear of any positive action. Times like these are when a tweet that seemingly flips the market into a knee jerk reaction, only corrects itself the next day, if not hours later.
Stay tuned for how this roller coaster ends its ride over the next few meetings!