Crude Oil Market

An oil price war and the pandemic struck the crude oil market at a time where the industry was already faced with a simultaneous demand and supply shock. Put simply, crude oil prices were already under pressure due to a flood of supply at a moment of diminishing demand.

A Supply Glut which is mainly driven by US shale producers and a Weak Oil Demand Growth driven by the structural shift in the market!

2020 was set to be the confirmation of a new era for climate change. As we entered a new decade, the extreme weather conditions around the world have forced leaders of many countries to reassess their actions over climate change and transform the global energy system.

In the face of stronger climate action, the energy landscape is changing with the rise of renewables and the increased engagement on climate change, but there are still much debates about the pace of the transition and the extent of disruption.

The Pandemic

As the world grapples with the ongoing pandemic, different forms of lockdowns across the globe have severely impacted key industries of consumers of oil. Global activities have slowed down on a massive scale with empty roads, grounded aircraft, plunging car sales and disrupted supply chains abruptly sapping oil demand.

The extent of the disruptions in the energy market caused by the pandemic might leave a lasting impact on the oil market which may take years to overcome. Overall, it might still be too early to see that the pandemic could be the reason that either accelerate the pace in using renewables or delay that process.

Below $50

The coronavirus outbreak has caused crude oil prices to fall to its lowest level in more than a year and tumbled below a key $50 level. In a desperate attempt to stabilise oil prices, the world’s biggest oil producers have agreed to slash the world’s oil production to lower supply to counter the steep fall in demand.

Source: Bloomberg Terminal

Oil Demand Outlook

While weekly crude oil inventory reports might provide some relief from time to time to the oil market, traders are mostly concerned with the ongoing uncertainty on the demand outlook. The Oil Market Report October 2020 and the World Energy Outlook 2020 released this week provided some clarity on the energy market.

In its October report, the International Energy Administration (IEA) reported that volumes of crude oil held in floating storage fell sharply by 70 mb (2.33 mb/d) to 139.1 mb in September. The IEA also predicted a significant stock draw in the fourth quarter which provided some support to crude oil prices. However, the World Energy Outlook 2020 report released earlier this week reiterates the struggles of the energy market in the coming years.

The organisation identified four main scenarios to analyse key uncertainties ranging from an energy world in lockdown to mapping out and building a sustainable recovery:

1. The Stated Policies Scenario (STEPS) The COVID-19 pandemic has caused more disruption to the energy sector than any other event in recent history, leaving impacts that will be felt for years to come. In this scenario, COVID-19 is brought under control in 2021 and the global economy returns to pre-crises levels the same year.
2. The Delayed Recovery Scenario (DRS) In this scenario, the shadow of the pandemic looms large – Global energy demand rebounds to its pre-crisis level in early 2023 in the STEPS, but this is delayed until 2025 in the event of a prolonged pandemic and deeper slump, as in the DRS.
3. In the Sustainable Development Scenario (SDS), a surge in clean energy policies and investment puts the energy system on track to achieve sustainable energy objectives in full, including the Paris Agreement, energy access and air quality goals.
4. The new Net Zero Emissions by 2050 case (NZE2050) extends the SDS analysis. A rising number of countries and companies are targeting net-zero emissions, typically by mid-century.

Given the forecasts on the demand side, there is also increasing pressure from OPEC members and its allies to balance the supply side and avoiding flooding the oil market with extra supply.

Crude oil prices have remained stuck within a range below the $50 mark as oil traders struggled to push prices higher dragged by the dire demand outlook. The energy sector is among the worst-performing sector in the stock market as investors are also shifting their investment towards green energy.

As lockdown eased, traders will likely eye the consumption of oil in emerging and developing countries rather than developed countries which are taking more steps towards climate change. The US election outcome might also be a driver of crude oil prices in the next couple of weeks as it will depend on the stance of the government towards climate change policies.