During periods of economic growth, societies often have to deal with higher oil prices. As economic expansion leads to high demand for all types of businesses (e.g., construction, travel, etc.), the price of oil tends to rise besides consideration related to its own supply and demand levels. Nowadays, due to the coronavirus economic shock, one cannot ignore the irony of wishing for oil prices to recover to normal levels.
Beyond the Negative Shock
In April this year, the US futures settled deep into negative territory. The clearinghouse settled the price at -$37.63, a whopping price for anyone in the industry. Never before since its existence, the oil price turned negative – it just did in 2020.
But after a month after the oil’s plunge into the abyss, the price is now surging. The V-shape recovery is not only seen in the price of oil’s bounce, but also in demand for the black gold, as it is also known.
Right into the end of March and the beginning of April, way before the price of oil turned negative, the mobility trends in the United States bottomed. At that time, it was unknown, but later data confirmed the drivers are taking on the streets again.
Last week, Apple’s mobility trends pointed to another increase in gasoline demand towards 8 million barrels/day, an increase of more than 50% when compared with 5 million barrels/day at the start of April. Still, if we compare with the data prior to the coronavirus pandemic, there’s still room to improve to reach the 9-10 million barrels/day seen before the crisis.
Moreover, the activity on futures markets picks up as well. One of the reasons why the price of oil turned negative in April was the lack of bids – no one wanted to buy.
On the final day of trading in the June contract, traders closed out more than 22 million barrels. More importantly – it managed such performance without the extreme volatility seen on the May contract expiration when the price of oil settled below zero.
All these factors point to a slow, albeit gradual, pick up in economic activity. China reopened after March, and demand from the world’s leading manufacturers picked up too. The European economies gradually open up, spurring further hopes of normalization, and some states in the United States follow the same path.
In the end, the price of oil simply follows economic growth around the world. Zero economic activity means no demand for oil. As the recent data shows, demand grows – expect the price of oil to do the same.