Is Oil Doomed or Poised for Recovery?

The oil industry has had a profoundly interesting year to date, and one that is changing many people’s perspectives on oil as a commodity. The reality is that the spread of the coronavirus and the worldwide recession it brought on negatively affected a number of popular commodities. In the case of oil though, it’s possible that the effects will prove to be particularly dire and long-lasting.

In an overarching analysis of how assets of this nature react in these economic conditions, we once pointed out that perishable commodities often fall in price during recessions, as a result of decreasing demand on international markets. This is broadly true regarding a number of commodities, but it is particularly applicable to oil given the nature of this recession. Typically, the logic is that there is less buying power when an economy is in recession, and so demand for commodity declines. For much of 2020 however, the lack of demand for oil hasn’t been based solely on the financial standing of consumers or industries. It has also been tied to basic safety and precautions. In other words, people are avoiding commutes not because they don’t want to pay for gas or buy airplane tickets, but because it hasn’t been safe to be out and about.

This, along with some disputes among major producers of oil, has amplified the impact on the commodity thus far in 2020. And it also raises the simple question of whether oil is now doomed, or whether it is still positioned for a recovery.

Looking at the most fundamental measurement of oil’s strength — its value over time — it’s difficult to get a clear picture of where things stand. On the one had, it’s clear that oil recovered from its deep and dramatic 2020 low point to date, and did so more quickly than some anticipated. On the other hand, it’s also apparent that said recovery was not complete, in that oil did not regain the value it had at the beginning of the year. We can also tell from the price charts that oil is still having some minor peaks and valleys, making it difficult to confidently define its trajectory. In short, oil may still be recovering, but its recovery may also be struggling.

Price aside, predictions and forecasts are also somewhat difficult to get a handle on, because right now they vary tremendously. On the more optimistic side of things, some in close proximity to the oil industry believe there could be a full recovery in a matter of years. Specifically, representatives from the International Energy Agency have predicted that demand could recover by 2021, with oil reaching pre-pandemic levels within a couple of years. That certainly sounds like a long timeline, but compared to more dire outlooks it’s actually somewhat promising.

As for those dire outlooks, they tend to take the full scope of the industry into account, and in some cases they speak to what would ultimately be a complete reshaping of oil’s strength and influence. For instance, British Petroleum — a major energy firm in this industry — has downgraded its own 30-year forecast for oil prices by 27%. This is a fairly dramatic number, and speaks to the long-term implications some energy firms anticipate, regardless of the immediate recovery (or lack thereof).

Additionally, it’s worth noting that some major oil companies face particularly grim futures because they were already in trouble before the 2020 crisis hit. A fairly sweeping piece forecasting oil bankruptcies pointed out that in addition to bleeding cash in the present, some of these companies have mountains of debt coming due, and are no longer in a position to refinance it. In short, the oil industry has benefited from an easy borrowing climate for the better part of a decade, and is now both strapped for cash and unable to secure further loans. This could force several individual companies into extraordinarily precarious positions in the near future, regardless of the broader industry’s prospects for more long-term recovery.

With all of this information at hand, you can see that it’s difficult to form a comprehensive analysis or even a fully informed opinion about the likelihood of (or timeline for) recovery. That alone, however, speaks to the uncertain position of oil at present, both as a commodity and as an industry.

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