The Fuse

Where Will The Oil Markets Be In Six Months?

by Robbie Diamond | April 21, 2020

It is hard to believe what we are seeing in oil markets. The news alerts yesterday about oil prices sinking below $0 were being exchanged by oil experts and traders in disbelief. In just one day, the price of West Texas Intermediate (WTI) oil—the American benchmark—slumped an astonishing 306 percent, dropping almost $56 to a historic low of minus $36.73.

The flattening of the COVID-19 curve is plummeting the oil price curve.

The flattening of the COVID-19 curve is plummeting the oil price curve, helped by the strategic effort of Russia and Saudi Arabia to drive domestic producers out of business. Energy policymakers in Moscow and Riyadh might not be health experts but they knew that just as COVID-19 sadly kills more humans with pre-existing conditions, it can also kill companies with pre-existing conditions like the domestic oil industry with soaring debt, higher production costs, and poor balance sheets. It was cool and calculated.

Despite any subsequent verbal agreement to remove oil from the market, the shut in barrels that are produced more cheaply than U.S. barrels and backed up by the financial reserves of these energy country behemoths can just be flooded into the market again when demand begins to show some signs of life.

On the one hand, this negative price for WTI is just a momentary event caused by the fact that the futures contract for May delivery expires today. The forward price for oil in June closed at $20.43 and the price for November ended at around $31.66, which is a sign that traders are betting that demand will bounce back. However, it should be noted that $30 is still less than breakeven for many domestic producers.

This is not a criticism of the importance to the country of domestic production and the amazing innovative spirit of domestic producers, particularly independents, but an acknowledgement that their activities are just one more component of the diversity that is needed.

The truth is that the United States is really energy dominant, except it is not just about oil dominance but rather all fuels—from natural gas to renewables, from hydropower to nuclear.

The truth is that the United States is really energy dominant, except it is not just about oil dominance but rather all fuels—from natural gas to renewables, from hydropower to nuclear. We just need to harness Energy Dominance in a different way, which means using all those fuels in the transportation sector. No country can claim such fuel diversity and the ability to tap so many energy sources, from the sun in the south to the wind in the Midwest to the hydro in the west, and the natural gas in shale.

As noted above, oil prices in November are still just about $30, which on one hand is a vote for economic confidence but also a sign of continued weakness. We can question when will things get back to some semblance of normal with people driving and flying again, but one can also ask the question about what might never go back to the way it was. Peter Tertzakian, a Canadian energy analyst from ARC Energy, wrote a great book in 2009 called The End of Energy Obesity discussing that it was the barrel we do not use due to a change in habits that will have a much more profound effect on energy demand than solutions like efficiency or environmental efforts to leave oil in the ground.

With all the Zoom meetings, family gatherings, online religious events, the telemedicine, and the contactless delivery that is poised to be electric while also autonomous, will we just use less. We will, of course, as humans want to get together to see and hug family and interact with co-workers, but the question of how many airplanes might we not get on for out of town meetings or trips downtown we might not take has yet to be answered. It is just one example of what might change.

The work of SAFE always asked the question of what will happen to the international order if oil does become a low-priced commodity, and many countries who depend on that revenue for their state budgets become insolvent with no economic prospects. This was clearly one of the reasons that Saudi Arabia launched Saudi Vision 2030 and other countries talked about using this time to create more viable economies. The United States was once in a position financially, or even geopolitically, to help with this transition but the time might come in the months ahead when we see a resurgence in instability and conflict, particularly in the Middle East.

Is this the second pandemic for the region? We already see Iran harassing the U.S. Navy in the Persian Gulf. Iraq has seen months of protests against the government, which is struggling with budget shortfalls. The same can be said for a myriad of countries in the region. There may have been a time that the United States cared, but it seems increasingly unlikely. In the end, it might be a fall in supply—caused by the instability in the Middle East, upon which we have always depended for oil—that saves prices when demand fails to recover.

In the end, Churchill is once again correct and SAFE’s mission continues to find “security in diversity and diversity alone.” It is the diversity of fuel in transportation that will make any energy price curve in the future irrelevant to our economic and political wellbeing.

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