My, How the Feeble Have Risen
A little over a month ago, the oil market was in a state of utter disarray. In fact, domestic crude oil prices were trading at prices deeply in negative territory. I posited in my April 21st blog that "we may be closer to a bottom than most pundits believe." We were wrong - the oil price had already bottomed! Since late April, oil prices have risen steadily and are now trading north of $35 per barrel. What are the factors that have made it possible for the price to recover so quickly?
Let us first understand why many pundits were caught off guard. There is an old saying that “the cure for low oil prices is low oil prices.” As the oil price plummeted, we began to see aggressive actions by oil producers across the globe to shut in high cost production and pare back capital investment. While the Covid-19 pandemic sharply impacted the near-term global supply/demand imbalance, the gap since has narrowed sharply. Moreover, I see early signs that the demand side of the equation is beginning to improve.
The near shutdown of the airline industry has been a major drag on the demand side. But, as the economy is shifting from the lifting of shelter-in-place policies across the country, air travel is beginning to rebound, albeit at levels well below the peak. Moreover, it may take quite some time before demand for jet fuel attains pre-pandemic levels.
But as summer approaches, Americans are anxious to resume a sense of normalcy in their lives and are planning for some much-needed vacationing. Because travelers will likely remain concerned about safely, I anticipate that travel will once again be dominated by personal automobile excursions rather than commercial flights (remember the days of car vacations?). The Wall Street Journal reported yesterday that there is anecdotal evidence of an increase in traffic congestion in recent weeks as people are avoiding public transportation and airplanes. The Journal cited a 48% decline in gasoline consumption in the early weeks of the pandemic, which has narrowed greatly today to about a 16% decline versus a year ago.
Increasing gasoline demand may explain the recent price rise in crude oil. Rising oil prices could also explain the outperformance of energy stocks in the stock market of late. While demand is on the rebound and supply has declined, I do not believe that oil is headed for a large price spike. Increased demand could be satisfied by a return of the large supply curtailments made by OPEC members. But it is safe to say that the fossil fuel market is not dead and that we may have already witnessed the lowest prices for generations to come.
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