COVID-19 Up, Oil Prices Down: The Geopolitical Forces Driving the Energy Markets During the Pandemic

Steve Hendrickson discusses the challenges in today’s energy markets resulting from the recent Russia-Saudi Arabia oil-price war and the global pandemic.

June 2020

Key Points:

  • Energy demand softened in 2019
  • The pandemic has reduced overall demand for oil 25%-30%
  • Shut-ins of oil production could reduce supply and stabilize prices

Steve Hendrickson, President of Ralph E. Davis Associates, has seen his fair share of turmoil in the energy industry over the past thirty years. Still, the culmination of unfolding events these past months may be the most impactful yet. Hendrickson provided his knowledge and insight to help break down the factors now rocking the energy industry.

“This situation is changing rapidly. It’s almost hard to respond to the events of yesterday when today brings something new.”

Several factors contributed to the issues now facing the oil market, according to Hendrickson. The first is a supply and demand problem. The U.S. produces 11-12 million barrels of oil (MMbbl/d) a day when several years ago, it generated 4 MMbbl/d. And this supply increase doesn’t match up with current demand. The market softened in 2019, and OPEC began to tighten supply to keep prices steady. In a turnaround, Russia decided to cease giving up market share, which led to more competition with lessening demand. Russia’s ability to withstand the changes in demand better than other OPEC nations fueled the pricing war. Per barrel prices of oil already dropped roughly $10/bbl before the pandemic hit in force.

“This situation is changing rapidly,” Hendrickson said. “It’s almost hard to respond to the events of yesterday when today brings something new.”

Uncertainty is a killer for the energy market. “Just a small amount of oversupply, a million to a million and a half barrels, results in a decline of about 30% in spot prices,” Hendrickson said. With no one knowing how the pandemic would play out, and demand dropping in an unprecedented fashion, supply quickly glutted the market, and oil prices crashed. Now supply is so overflooded storage is filling up to capacity.

Hendrickson expects oil producers may have to begin shut-ins of their wells to reduce production and internal costs and stabilize oil prices. These actions may provide a dampener to the situation, but there are still plenty of unknowns as the world rides out the pandemic.

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A headshot of Steve Hendrickson.
Steve Hendrickson

President | Ralph E. Davis Associates