Major factors affecting crude oil prices are current supply and total output, future supply and reserves, demand from industrialized countries, and political situations and crises. The quick increase of the coronavirus this year has seriously damaged the global economy. Threatened by the economic recession, global oil demand has remained very weak over the past 8 months.
According to Bob McNally of the US-based Rapidan Energy Group, an energy market, policy and geopolitical consulting firm “It is very rare for a demand collapse to coincide with a supply surge. It is the most crude price-bearish combination since the early 1930’s (post Great Depression). The price collapse has just begun”.
Oil prices were also severally affected by the Russia–Saudi Arabia oil price war that started in March this year. Namely, this war was triggered by Saudi Arabia following Russia’s turn down to decrease oil production to maintain oil prices at a lower level. The outcome of this economic conflict was a fall in oil prices in the spring of 2020.
But how and why does the drop in oil prices affect the global economy? For the United States, the drop in oil prices is not a major issue because it is hardly a net exporter. For the global economy, the decrease in oil prices due to demonopolization is a net plus.
Oil importers find this situation beneficial because the prices of their oil imports drop. Many countries, including India, who imports 82 per cent of their oil and currently sustains a substantial debt, the fall in oil prices gives some rest period in their failing economy. In 2018-19 alone, India spent $87 billion on imported oil.
In December 2019, experts agreed that growth in U.S. shale oil production was slowing. The U.S. Energy Information Administration (EIA) predicted domestic crude production to increase by 1 million barrels a day in 2020. This estimate was enough growth to cover the expected increase in global demand.
However, no one could have predicted that 2020 is going to change life as we know it. Oil prices were on a rollercoaster this year, dropping to 10.5 million barels per day, the lowest number U.S. has seen since March 2018. Compared to 2019, in June 2020, the demand for crude went down to 20 per cent amid the first wave of coronavirus outbreaks, EIA said.
Rising oil prices cause an increase in inflation, which affects the economy across the board. All products containing petroleum products are directly impacted by oil prices, and so affects inflation. An increase in oil prices can make other goods too expensive to produce, reducing supply.
“There are concerns about the stalling economic recovery,” said Phil Streible, chief market strategist at Blue Line Futures LLC in Chicago. When the world gets a vaccine, widespread reopenings and a meaningful increase in travel, “that’s when you’re going to start to see demand pick up” and prices rally.
For the second half of 2020, EIA expects monthly Brent spot prices to average $43/b and increase to an average of $50/b in 2021. In July, the global coalition reported demand for OPEC’s crude oil is set to bounce back next year at a historically quick pace. Productivity for OPEC crude oil is estimated to see a rise of 25% to 29.8 million barrels per day in 2021. These levels are a little higher than levels in 2019.
Industry experts estimate that it may take two more years for oil demand to make a complete recovery, and according to UBS, the oil prices will spike 115% by the end of this year.