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Oil Price In Free Fall Collapse As Energy Sector Implodes

April 23rd, 2020 Comments off

The demand destruction created by policy responses to the Covid-19 pandemic has led to the collapse of oil prices, and the decimation of the energy industry. No better example illustrates this than the April 20 data for next month’s delivery, in which prices went to zero per barrel and even negative, with WTI (West Texas Intermediate) going to minus $30 per barrel. This surreal price discovery was brought about by a combination of demand destruction in the economy, combined with a lack of storage capacity for oil, leading to producers paying consumers to take their oil.

The implosion in oil prices has occurred in spite of the truce in the oil price war recklessly unleashed by Russia and Saudi Arabia right at the beginning of major global recession. The cut in production by three million barrels a day by OPEC and Russia is statistically insignificant, given that the coronavirus has shuttered much of the world’s economy, leading to a fall in consumption of more than 20 million barrels per day.

The hope that  oil prices may recover latter this years is based on a flimsy premise that there will be an economic recovery by year’s end. This looks increasingly unlikely, and the probability of a second wave of Covid-19 will continue to depress industrial and transportation activity that typically consume most oil production. Short of a war in the Middle East that would shut down the Strait of Hormuz, oil prices are likely to remain depressed for the foreseeable future, crippling much of the energy industry and confronting a multitude of oil producers, especially shale oil companies in the United States, with increasingly inevitable bankruptcy.

What is occurring in the  energy sector is a reflection and indication that the Global Economic Crisis unleashed by Covid-19 will not only exceed the financial crisis of 2007-09 in its severity; it is increasingly likely to rival the Great Depression of the 1930s in its ruinous impact.