All eyes in the oil market are on OPEC and Russia as we wait to see whether they can agree on huge production cuts in response to plummeting global oil demand. The outcome of that meeting, and whether the concerned parties actually stick to their production quotas, will determine whether oil prices keep rallying or sink back toward their recent lows.
As a quick refresher of just how deep a bear market crude oil has fallen into: West Texas Intermediate traded as high as $63 per barrel in January and then dropped all the way to $20 in late March. That was the cheapest WTI had been in about 18 years. But crude has since rallied to about $24 on hopes that the world’s major oil exporters will slash their output.
One thing is for sure: Oil prices can’t rise without enormous production cuts, because global energy demand has fallen off a cliff since the coronavirus pandemic hampered travel around the world. In its latest weekly report, the Department of Energy reported that the U.S. consumed only about half as much gasoline as it normally does. Ditto for jet fuel. (Diesel consumption remained strong: A reassuring sign that food and other critical freight is still being shipped around the country by truck and train.)
The global economy consumes roughly 100 million barrels of oil each day. Or it did, before COVID-19 struck. Now, estimates of global demand are dropping fast. OPEC’s secretary-general said that “the supply and demand fundamentals are horrifying.”
Reports from the ongoing negotiations indicate that OPEC, Russia and other oil exporters are closing in on hefty cuts, totaling millions of barrels per day. Agreeing to such a drastic cut and then actually sticking to it will be a challenge for countries whose budgets depend heavily – in some cases, almost exclusively – on pumping and selling oil. If they can do it, don’t be surprised if WTI continues its recent rally. But don’t expect prices to return to “normal” anytime soon. The gaping hole in global demand is just too big for that.
And if OPEC and its allies fail to deliver on agreed cuts, look out below. The world is running out of places to store excess crude during a time of extremely weak demand. If the flood of excess production continues, you’ll soon hear talk about oil prices in single digits.