Oil prices are back at levels last seen in mid-March, and while fundamentals for crude have improved somewhat, markets have become too optimistic
Market euphoria continues to push financial markets and commodities higher, and oil prices have climbed back to levels not seen since lockdown orders in the U.S. began in March.
By a variety of metrics, markets have recently made up a lot of lost ground over the past two and a half months. The Dow Jones Industrial Average surged past 25,000 points on Tuesday, and the S&P 500 jumped above 3,000. Both thresholds were last reached in March.
WTI rose above $34 per barrel on Tuesday, another two-and-a-half month high. “For Economy, Worst of Coronavirus Shutdowns May Be Over,” a Wall Street Journal headline blared, citing an array of hopeful statistics on hotel spending, restaurant bookings and airline traffic.
But the gap between the stock market and the real economy continues to widen. Over 38 million people have filed for unemployment. Corporate bankruptcies have begun to accelerate, even as the worst lies ahead. A real estate crisis is brewing in both corporate and residential sectors, with millions of people and thousands of businesses unable to pay rent and mortgages.
In the oil market, improving sentiment has at least some basis in fundamentals. Rystad Energy estimates that the oil market was oversupplied by around 16 million barrels per day (mb/d) in April, a massive overhang that forced prices into negative territory. The rapid shut in of around 12 mb/d (largely shouldered by OPEC+) has erased a huge portion of the surplus. The widely-publicized rebound in demand – of around 4 mb/d, according to Rystad – puts the market close to “balanced” in June.
However, again, there is a disconnect between sentiment and the current state of the market. Oil prices are back at levels last seen in mid-March, prior to the shutdown of the economy. “We find it hard to justify why prices are where they were on 11 March,” Standard Chartered wrote in a note on Tuesday. “We do not think expectations about the future have brightened significantly since this date.”
The investment bank noted that the IEA’s projection for global demand in March was a slight decline of just 90,000 bpd for 2020. Now, the agency’s estimate is for demand to decline by 8.63 mb/d, “96 times more than the estimate on 11 March,” Standard Chartered pointed out. And yet, oil prices are trading in the mid-$30s, just as they were in March. Related: Morgan Stanley Expects $40 Brent By Christmas
Supply curtailments have erased much of the glut, but a supply-driven correction means that production can come back online as soon as prices rise to tolerable levels. That, in turn, means that prices are capped to a large degree. “Had the market owed its strength to upside surprises in demand, it could continue past USD 40/bbl with renewed strength,” Standard Chartered said. Instead, the surge in prices is because of supply shut ins, which can quickly be reversed.
The bank estimates that the U.S. could bring 2 mb/d back online with WTI between $30 and $35. And with Brent at $40, the durability of the OPEC+ agreement starts to come into question. As such, “we think the rally is running on fumes,” Standard Chartered said.
“We also do not think that expectations about the global economy have brightened since 11 March, nor have expected timelines for any putative vaccine or return to previous economic conditions shortened,” Standard Chartered warned.
Meanwhile, a second wave of infections remains very possible. In fact, the rate of coronavirus infections is on the rise in at least 12 U.S. states. Rural parts of the U.S. are suffering from the latest surge in cases. Also, the pandemic is only now beginning to explode in places like Brazil and India. It has yet to work its way through much of the world – and could return to previously hit areas that are now reopening.
“[O]verall, the demand backdrop does not justify a return to anywhere near 11 March prices, in our view,” Standard Chartered concluded.
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And yet, to much fanfare, New York Governor Andrew Cuomo rang in the New York Stock Exchange on Tuesday, marking the reopening of the exchange’s trading floor. Stocks surged in response.
By Nick Cunningham of Oilprice.com
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This disease is asymptomatic in most people who get it, and has very mild symptoms in many more. It is really only dangerous to a very small percentage of the population, very few of whom are in the workforce, or even drive very often. The average age of people who die from this virus is roughly equivalent to the average life expectancy. Oil is nowhere near where it was before this began, and suggesting that it is is misleading.
Travel was quickly brought to a standstill after the beginning of February, when the travel ban on China was ordered, which stifled all travel around the world. Oil was at $53 on February 20th, then fell to $35 by March 11th. Oil was in a roughly $40-$60 range for the past 5 years before that. Without government-imposed restrictions, and with proper hazard communication, oil will rise to $50 a barrel by the end of the summer.
If governments maintain lockdowns for much longer, however, instead of only protecting those most at risk, and giving them preventive prophylaxis, those governments will cause a great depression and ruin the lives of millions of people, for absolutely no benefit in fighting the virus whatsoever, compared to what could be done by simply protecting the 5% who are most at risk.
The public eagerly wants to get back to work, and indeed, must do so, or else they will be ruined. All of what you mentioned can be avoided, if the government restrictions are lifted. China is already back at full capacity, according to Elon Musk, who has thousands of employees in China.
The U.S. government need only order states to go back to work, under the defense production act, labeling all businesses as essential to the security of the nation for the next 4 months, and all of the disastrous economic and societal consequences mentioned in this article can and will be averted.
Herd immunity may be much closer than most people realize. 14% of New Yorkers had already had the virus in antibody studies, as of over a month ago. It takes 60% to 70% to develop herd immunity, where the virus will die out completely. That should be the goal, while protecting the elderly (65 and over), and then we will have nothing to fear from this virus.
Get this country open again, and our entire economy will come roaring back to life very quickly. If it takes a government order to fix a government mistake, and to open everything in every state, then perhaps that is what will have to happen.
It almost seems as if some states that are aligned with a certain political party, however, are willing to ruin their entire economy and bring the nation and all of its people down with them, if they think it might make the other party look bad in November, which is a far more dangerous and difficult problem to solve than this virus or this economic slowdown.
"There is nothing to fear, but fear itself."
- Franklin D. Roosevelt
"The boisterous sea of liberty is never without a wave."
- Thomas Jefferson
I am an oil investor, currently long on oil, and a former public health official for the U.S. Army.