Oil prices not likely to see true bounce-back in the near term

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Crude oil prices may have recovered from their recent lows, but we aren’t going to see a bounce-back anytime soon.

This is the case despite efforts to cut production, as the market remains in massive surplus and the devastation of the coronavirus pandemic depresses consumption (even among economies supposedly coming out of lockdown).

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Unemployment has skyrocketed and despite government hopes it will be short term, the reality is levels will remain elevated, depressing growth and demand.

Oilprice.com states in a recent post that the U.S. Labor Department reported total nonfarm payroll employment fell by 20.5 million in April, causing the unemployment rate to hit 14.7%. This is the highest rate of unemployment and the largest monthly increase since January 1948.

Meanwhile, the International Labor Organization reported that some 1.6 billion workers in the informal economy, representing nearly half of the global labor force, are in immediate danger of losing their livelihoods due to the COVID pandemic.

Within the formal economy, things aren’t much better.

Industries such as the aviation industry suffering through record-breaking losses, the post advises. The collapse in oil prices has hit revenues, profit and cash flows hard, with most of the major oil companies already incurring huge losses. Many companies within the oil and gas industry are expected to go out of business as the losses mount and prices remain low, Oilprice.com states.

Oil industry revenues have collapsed. Oilprice quotes Rystad Energy research estimating revenues will plunge by around $1 trillion in 2020, falling to $1.47 trillion from $2.47 trillion last year. They were also of the view that 2020 will see the lowest project sanctioning activity since the 1950s in terms of total sanctioned investments, which stands at $110 billion – only 33% of the investments in 2019. Many companies have already abandoned or deferred their major projects as they seek to hoard cash.

This lack of investment will, in the short term, help to stem supply and hence contribute to a slow recovery in prices.

But in the longer term – and there are long lags between investment and production, even in the shale industry – it will create a substantial and lasting drop in supply.

While it could be years before the effects of the coronavirus are overcome and global growth gets back to where it was, consumers should not get used to the idea of low oil prices being here forever. The market has the makings for the very early stages of a long-term recovery upcycle. Permanently shelving plans for greater energy efficiencies or switches to alternative non-oil feedstocks on the assumption we will now have low oil prices in perpetuity may be unwise.

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As promising as electric vehicles and alternative energy sources are, we are not going to do away with oil and gas anytime soon, particularly as lower prices may well encourage many shorter-sighted or more challenged industries to stay with oil-based technologies or energy sources.

Dire as current employment and global growth prospects appear, we should remember this too shall pass and, in time, the next cycle will take hold.

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