COVID-19 : Oil’s Nemesis or Opportunity?
It’s been a while (about two to three quarters) the dreaded novel Coronavirus aka COVID-19 has spread across the continents. Originating from a single district it is now available in most parts of the globe in varying degrees. Governments have scrambled to bring lockdown and other measures to contain so that it does not go beyond the health care system’s capabilities of handling new patients.
Lockdown has seriously impacted travel, economic activities thereby the demand for oil has reduced drastically. This has been reflected by the dramatic collapse of oil prices and one time it was negative for WTI. The oil price has settled somewhat in the region of $45 per barrel from around $ 60 or so before this virus arrived.
Empty Hongkong Airport due to Lockdown
Sustained low oil prices will eventually trip the high-cost producers like shale oil, oil sands, and probably offshore oil as well. This will also have a long-lasting impact on alternative energy as a substitute. Historically it has been observed that the push for the alternate energies is far more when the oil prices have been in the region of $100 per barrel and above. Therefore climate talks and sustainability costs will not outweigh the lower cost of oil so it would need to wait for the oil price to climb high to impress the governments and general public that high priced alternatives are more suitable than cheap oil.
As we wait for the arrival of the vaccine the economy is limping back to a new normal with a severe lockdown at some of the districts. The demand for oil is gradually picking up and will require a few quarters to reach 80-90% of the pre-COVID consumption. The opportunity for oil as never before as the prices are low and it is easily available for using it to fire up the economy. Due to these prolonged lockdowns, the economic activities have been reduced pushing many millions of people jobless. Governments around the world will provide stimulus to the economy to kick start these idle assets and would require crude oil in one form or the other to move forward. It is imperative that the demand for crude oil will pick up and the price will follow.
Looking at the situation at hand now the oil will play an important role in rebuilding economies as it has done in the past and the alternative energy will have wait for its chance of redeeming it at a higher price of oil when the demand for crude oil would outweigh its supplies and that’s a long way to go.