Oil has recently gotten a boost in its price from Mother Nature. Tropical Storms Laura and Marco have been gaining in intensity and are approaching hurricane strength, warned the national hurricane center in Florida.
They forecast that hurricane Laura is set to strengthen over the Gulf of Mexico, with an increased risk of dangerous storms, wind, and rainfall along portions of the US Gulf Coast. This has forced around half of the oil production in the Gulf of Mexico to halt in precaution for the two hurricanes.
Brent Crude was trading just a tick above $46 a couple of hours ago – however, sits firmly above $45 a barrel, solidifying a closing of the gap left from the $10 drop in oil price when Saudi and Russia announces a price war.
This highlights something about the oil markets we sometimes forget, and that is the oil is a spot asset. Unlike equities, which discount predicted future earnings, oil does not have the luxury of taking into account earnings, beating analyst estimates, premiums, etc. Oil is directly affected by supply and demand. In this case, supply was cut due to mother nature, therefore pushing oil prices upwards.
However, it will take a lot more for oil to get back to its heydays. Even though OPEC+ and the United States took drastic measures by cutting oil supply by 10.7 Million barrel a day through the peak of the lockdowns, oil demand is still 10% lower than it was in 2019. However, in the United States, we have seen five weeks of net outflows from Crude Oil inventories, which suggest oil demand may be on in the swing of a recovery. However, in my part of the world, I’ve seen fuel prices recover close to levels pre Coronavirus.
It is interesting to note one of the effects that low oil prices have had on the Market. Once the most valuable company in the world in 2013, Exxon Mobil, an American oil and gas corporation, has been kicked out of the Dow Jones. Exxon was the oldest company in the Dow Jones. Pharmaceutical company Pfizer and Aerospace and defense manufacturer Raytheon Technologies are also seeing the way out, being replaced by Salesforce, Amgen, and Honeywell.
With price wars between Saudi and Russia, to negative oil prices all during the Coronavirus, Oil has had one of its most turbulent year to date. However, deep cuts from OPEC and a resurgence in oil demand has helped oil prices stabilize around the $40 mark – with Brent peaking just under $43.929, just short of the psychological $44 mark. However, this is shy of the $45.5 mark required to close the gap pre-coronavirus.
It is interesting to note that Brent Crude is down 2.29% today; however, the American equivalent, WTI Crude, is down 3.1% today. This shows that the market is slowly, but finally, pricing in risk for different macro conditions. It makes sense that WTI, the grade of oil many American companies and citizens depend on, is lower due to Coronavirus cases continuing to climb in many large fuel consuming states such as California, Texas, and Florida. However, Brent Crude, the oil grade used worldwide, is down slightly due to the majority of the global population slowly emerging out of lockdown after relatively successful lockdown measures.
With oil shale companies taking on vast amounts of debt only serviceable with oil prices being at $60, low oil prices have been devastating for US shale producers. This is on Whiting Petroleum and Chesapeake energy filing for bankruptcy after they could not service their debt. Andy Lipow, president of Huston based consulting firm Lipow Oil Associates, stated that he does not “think $40 oil is enough to turn the shale industry” and that “the price is not enough to cover all the debt and costs that have been incurred during the boom.”
However, not everyone is so bearish on the Black Gold. Christyan Malek, JP Morgan’s leading oil equities analyst state that there could be a supply gap around 2022 from delayed infrastructure projects and restricted supply, stating that “Covid-19 has increased the chances of much higher prices,” and that “the next oil supercycle” is on its way.
This pattern of market pricing in risk is not only limited to the oil markets. Today the NASDAQ closed higher, while the Dow Jones and the SP500 both closed lower as tech stocks and their balance sheets show their resilience in the Coronavirus era compared to more traditional businesses.
For now, however, we are likely to see oil range between the $40-$43 marks and $38-$40 marks for Brent and WTI respectively until positive signs show that oil demand is entirely on the road to recovery.