Could we see a full oil recovery this year?
Some quick numbers – Globally, there are over 15 Million Coronavirus cases and 618,000 deaths due to the pandemic. An estimated 47 million people may lose their jobs in the United States alone. Oil dived into negative, an unprecedented move. However, the NASDAQ is having its best year having made a V shape recovery, Elon Musk is the 13th Richest person in the world surpassing Warren Buffet, and masks are all the rage.
However, this optimism hasn’t translated into the oil markets. Although we’ve seen a double in price from its March lows, March lows were around $16-$20 a barrel, which is fiscally and financially unsustainable for all oil-producing companies. This V-shape recovery in equities was caused by investors and traders baking in potential future earnings and using it to value the stock price now. The main problem is that there is no set rule as to how far ahead in the future investors and traders should look forward – enabling essentially an “oh, they’ll be fine after the Coronavirus” mentality. Oil does not have this luxury. Oil needs to be delivered every month. This means speculators and traders (in the physical market) can’t wait for future results.
If the equity markets look into the future, the spot market looks at the now. With Gold, a safe haven asset reaching all-time highs and Oil struggling to get back past its boom days, both commodities recognize the current risks the world faces due to the Coronavirus.
We can see that in the United States, the recovery in oil is stalling due to a second wave of the Coronavirus, forcing people to travel less and stay at home more. Cushing Crude oil stocks are not coming down from their all-time highs, and Petrol demand is down 100,000 barrels per day (b/d). We may see a spread between the US benchmark WTI and Brent Crude, the global benchmark as travel around the world picks up relative to the United States.
However, long term trends with government stimulus for greener alternatives to fossil fuels may prevent oil from ever getting back to its hay days. With Joe Biden putting clean energy at the forefront of his $2 Trillion campaign and the EU 750 Billion Euro recovery fund pledging 1/3 of the fund to fight climate change, oil sees pressure downwards both from the demand and supply side.
The fundamental issue with oil is the opportunity cost dynamic relative to other energy sources. With oil prices quite low, renewable resources are expensive in comparison to oil. However, with billions of government stimulus, alongside the supply of oil slowly drying up, exploration for new oil reserves would yield a lower return, increasing the opportunity cost and oil price. While a restriction in supply and an increase in price would be good for oil producers in the short term, with everything else equal, a shift to renewable energy will ensue. Energy Strategist at think-tank Carbon Tracker, Kingsmill Bond, stated that “the world has 50 years of proven oil reserves.” Furthermore, he stated, "the prospect of declining demand as a result of electric vehicle adoption and policy changes means we no longer need a huge oil exploration industry tooled up forever-rising consumption – the talent and resources of the industry can be deployed elsewhere.”
However, this has not stopped some producers from making big bets. Chevron acquired Noble energy in an all-stock deal for $13 Billion in amidst of bankruptcies in the oil industry due to the Coronavirus.
For now, the Coronavirus is controlling the oil markets. However, we may see a slow shift out of fossil fuels as time goes along.
However, this optimism hasn’t translated into the oil markets. Although we’ve seen a double in price from its March lows, March lows were around $16-$20 a barrel, which is fiscally and financially unsustainable for all oil-producing companies. This V-shape recovery in equities was caused by investors and traders baking in potential future earnings and using it to value the stock price now. The main problem is that there is no set rule as to how far ahead in the future investors and traders should look forward – enabling essentially an “oh, they’ll be fine after the Coronavirus” mentality. Oil does not have this luxury. Oil needs to be delivered every month. This means speculators and traders (in the physical market) can’t wait for future results.
If the equity markets look into the future, the spot market looks at the now. With Gold, a safe haven asset reaching all-time highs and Oil struggling to get back past its boom days, both commodities recognize the current risks the world faces due to the Coronavirus.
We can see that in the United States, the recovery in oil is stalling due to a second wave of the Coronavirus, forcing people to travel less and stay at home more. Cushing Crude oil stocks are not coming down from their all-time highs, and Petrol demand is down 100,000 barrels per day (b/d). We may see a spread between the US benchmark WTI and Brent Crude, the global benchmark as travel around the world picks up relative to the United States.
However, long term trends with government stimulus for greener alternatives to fossil fuels may prevent oil from ever getting back to its hay days. With Joe Biden putting clean energy at the forefront of his $2 Trillion campaign and the EU 750 Billion Euro recovery fund pledging 1/3 of the fund to fight climate change, oil sees pressure downwards both from the demand and supply side.
The fundamental issue with oil is the opportunity cost dynamic relative to other energy sources. With oil prices quite low, renewable resources are expensive in comparison to oil. However, with billions of government stimulus, alongside the supply of oil slowly drying up, exploration for new oil reserves would yield a lower return, increasing the opportunity cost and oil price. While a restriction in supply and an increase in price would be good for oil producers in the short term, with everything else equal, a shift to renewable energy will ensue. Energy Strategist at think-tank Carbon Tracker, Kingsmill Bond, stated that “the world has 50 years of proven oil reserves.” Furthermore, he stated, "the prospect of declining demand as a result of electric vehicle adoption and policy changes means we no longer need a huge oil exploration industry tooled up forever-rising consumption – the talent and resources of the industry can be deployed elsewhere.”
However, this has not stopped some producers from making big bets. Chevron acquired Noble energy in an all-stock deal for $13 Billion in amidst of bankruptcies in the oil industry due to the Coronavirus.
For now, the Coronavirus is controlling the oil markets. However, we may see a slow shift out of fossil fuels as time goes along.
Import the BlackBull Markets Economic Calendar:
blackbull.com/en/economic-calendar/?utm_source=tradingview
Free TradingView Premium with BlackBull Markets: blackbull.com/en/platforms/tradingview/?utm_source=tradingview
blackbull.com/en/economic-calendar/?utm_source=tradingview
Free TradingView Premium with BlackBull Markets: blackbull.com/en/platforms/tradingview/?utm_source=tradingview
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.