Oil Supply & Demand: What is Happening?
By Steven T. Merkel CFP®, CHFC® and Samantha R. Webster CFP®
Due to the current economic conditions caused by the COVID-19 virus, air travel is down, personal and business driving is down, and the price of fuel is at the lowest levels seen in quite some time.
Low Price Levels
On April 20, U.S. crude oil sharpest decline in over 30 years, due to a slump in demand. That day, West Texas Intermediate (WTI) crude for May delivery fell below zero for the first time in history. (1)
During December 2019, WTI crude oil traded at over $60 per barrel. On April 23, 2020, the price had dropped down to $16.50 per barrel – an over 70 percent drop in price.
Meeting of the Giants
In March, Saudi Arabia and Russia had a big disagreement. The Saudis wanted to cut oil output to help slow or stop the price erosion that had happened due to the drop in demand. The Russians wanted the output cut too but didn’t want to be the ones doing the cutting.
In April, OPEC (23 nations) and the other oil-producing countries agreed to cut 9.7 million barrels a day starting on May 1st, which is about 23 percent of their production levels. While this agreement will reduce the oil supply levels, many experts believe that this still won’t have much effect to counter the fall-off in demand.
Price Drop and Recovery
When the prices of one sector of the market drop so quickly, the move often is felt by other markets. Over time, continued low oil prices could lead to lower capital spending, higher unemployment figures, and credit market trouble as companies struggle to pay their bills.
The bright side is that lower oil prices mean cheaper gasoline for consumers, and relief for companies with high energy use (e.g., airlines, cruise ships, chemical firms, etc…). However, cheaper oil may pose a risk to the American energy industry, especially with the recent slowdown in transportation.
Ciccarelli Advisory Services is keeping a close eye on the oil markets to monitor whether this historic move may ripple through other areas or create opportunities for investors.
We invite you to contact our office to speak with your financial advisor if you have any questions.
1. FoxBusiness.com, April 20, 2020
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