Futures

Here’s what’s going on with oil – June 2020

Everyone who has been following oil futures knows prices have been irregular and unpredictable.  The beginning of economic re-expansion, increased storage capacity, and rising consumer confidence have spiked oil prices from the once negative number.  However, in reality, we could be seeing another dip in oil prices.  The lack of production output by the US is a reason for concern, in addition to further storage capacity.  We can only fully recover once our oil production reaches back to its original production, which may be harder than expected.

Truthfully nobody knows exactly what will happen, so there are a variety of possible outcomes.  But we can predict it may take a long time to return back to where we were.  We can also expect that we are peaking at an oil price right now due to the overconfidence in demand without understanding the lack of production.  We may also find ourselves in another oil storage crisis, causing prices to once again plummet.  All of this is disconcerting, and reason to expect a drop in prices and an opportunity to buy.  The US is currently in the process of re-opening its wells after shutting them off during the pandemic.  Once production increases we can then expect a full recovery, but this may be far in the future.    

It is also important to look at the changes in consumer patterns following the loosening of shelter-in-place orders in relation to oil demand.  There may be a lasting change in the dynamics of the workplace as many individuals will continue to work from home and reduce or eliminate airplane travel.  Staying home may be on a scale large enough to impact the future demand for oil, as less workers will be using their cars to commute to work.  The demand for business and personal airline travel may also be slow to recover to pre-Covid levels.  In addition, it is important to look at the long term implications of oil.  Oil is at the center of the 2020 US election as the use of fracking could be restricted over environmental concerns.  With increased restrictions placed on oil in favor of the environment, the production of US oil may be further restricted.

Although there are many reasons to feel confident in the rising oil prices, there are a variety of underlying areas for concern that may impact the demand for oil both in the short and long term.  Oil may not be as bullish as you once thought.   

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