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The COVID-19 pandemic has dramatically reduced oil demand, down to a level not seen since 1995. Supply cuts negotiated between OPEC and Russia have been insufficient so far to address the global glut. A dramatic gap between world demand and production is the net result. Because the economy will recover slowly (according to The Conference Board Global Economic Outlook), demand for oil will also recover slowly, and so the oil demand gap will remain large until the end of the year. Recently negotiated production cuts will help alleviate the pressure on oil prices and oil storage capacities as the year progresses but won’t be enough to lift prices, which will likely not exceed 40 dollars per barrel. This relatively low price will provide oil-consuming countries with some upside as they recover from the pandemic’s recession. At 40 dollars per barrel or below, some wells, especially in the Middle East, would remain profitable, and others may at least cover operating costs. However, low prices would prevent most producers from investing in new fields, which may pose a threat to the long-term viability of the industry.
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April 09, 2021
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