May 20, 2020 | Policy Brief

Oil Prices – More Like Post-9/11

May 20, 2020 | Policy Brief

Oil Prices – More Like Post-9/11

After a precipitous drop, the oil market has rebounded significantly over the past month, much like it did during the post-9/11 period, when oil prices recovered as travel returned to normal levels. As countries begin to loosen their coronavirus lockdowns, oil prices could very well hover in a “Goldilocks” band that will help facilitate economic recovery.

In the past month, oil prices have climbed back from a negative price for West Texas Intermediate (WTI) to a steady upward trajectory for both WTI and Brent prices. This price increase is consistent with market fundamentals. Anti-coronavirus lockdowns around the globe devastated demand in the spring, but prices are naturally rebounding as countries gradually lift their restrictions and oil demand returns. Increased demand for oil is especially notable in China, where driving has nearly reached pre-COVID-19 levels. The U.S. Energy Information Administration released data today showing a decline in U.S. oil inventories, indicating that oil demand continues to recover.

While the decline in oil demand was unprecedented, supply cuts have also exceeded expectations. Many OPEC members have reduced output more than required by the April production cut deal. U.S. and Canadian producers have likewise shut-in more wells than anticipated. These supplies will not bounce back quickly, because ramping up production is never as easy as it sounds. In addition, new investments have been put on hold, setting the stage for a tight market once demand fully recovers. The market is therefore likely to see a surge in oil prices in the fall and most likely even further into the future.

In the short term, with large volumes of oil still in storage, oil prices will likely remain modest despite the uptick in demand. As President Donald Trump noted, this is an almost ideal situation as the U.S. economy gets back on its feet: Oil prices will be high enough to provide some support to U.S. producers but low enough to facilitate general American economic recovery. But this situation will not last long.

Globally, demand for gasoline is recovering faster than demand for other oil products. Driving rates will likely exceed pre-coronavirus levels as fear of exposure to COVID-19 leads commuters to avoid public transportation. Demand for diesel, however, which is used more widely in commercial transportation, has not picked up as quickly. Demand for jet fuel remains dormant. These trends are reflective of broader economic patterns and should be noted to identify future economic trends.

In general, commodity prices will likely be volatile through the end of 2020 and most of 2021, corresponding to COVID-19 developments such as new waves of infection and the introduction of vaccines or therapeutic treatments. More broadly, there is no clear roadmap for how the global economy responds to government-imposed lockdowns. However, the current upward trend in oil prices likely represents a positive sign for U.S. and global economic recovery.

Brenda Shaffer is a senior advisor for energy at the Foundation for Defense of Democracies (FDD) and an adjunct professor at Georgetown University. She also contributes to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Brenda and CEFP, please subscribe HERE. Follow Brenda on Twitter @ProfBShaffer. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.

Issues:

China COVID-19 Gulf States