Petrolio pozzi (La Presse)

Are Oil Prices About to Go into Freefall Once Again?

Since the outbreak of the COVID-19 pandemic, the oil industry has been one of the most heavily-affected sectors of the economy hit by the unprecedented crisis. The unique anomalies that have been noticed in the supply and demand equilibrium have shattered oil prices, leading to the historical moment in April 2020 when future oil contracts being traded in negative (below zero) rates.

As a renewed surge of CIVID-19 cases hits in a second wave, and given the latest developments following the outcome of the US elections, worries around the oil prices threshold are coming once again into the foreground.

Second Wave of COVID Raises Grave Concerns for Oil Markets

As we are leaving the summer far behind, more and more COVID-19-related cases and deaths are being reported at the global level. By mid-October 2020, there was a remarkable trend in the Covid-19 incidents across the world, indicating that a second more aggressive wave of the virus is due.

This has been the exact case up to date, as we are witnessing the virus numbers moving rapidly upwards. As a response several governments, including Germany, France, and the UK have decided to reimpose lockdowns across several parts of the country or in the national level.

This new situation has created grave concerns as the lockdown policies not only sharply reduce the daily consumption of oil products in the everyday life of the citizens in these countries, but also trigger a hard blow on the aviation industry as a whole.

With the volume of international trips being dramatically downsized, the demand for petroleum-based jet fuel is sharply falling, bringing down together the price of oil across the global markets. By early November and once UK Prime Minister Boris Johnson confirmed that the country was entering again a national lockdown, the market promptly reacted and showcased the aforementioned concerns, sending the WTI price under $34 a barrel at some point during last Monday’s session (November 2). This was the lowest since early June.

Prices briefly rebounded during that week, due to the volatility that the US elections have created and also the fact that OPEC+ has started reconsidering the scheduled easing of oil production by January 2021, pushing the prices to gain some momentum, but significant worries remain.

Biden’s Election and Potential JCPOA Renegotiation

The election of Joe Biden as the 46th President of the United States could add further pressure on the short-term outlook of the oil prices. As mentioned earlier, the race to the US elections has helped the prices to shortly rebound by mid-week; however, Biden’s win could affect the short-term performance of oil for two major reasons.

On the one hand we should anticipate that the President-elect will adopt a much stricter policy towards the COVID-19 pandemic. While Trump has followed a focused strategy, trying to mitigate as much as possible the grave consequences of the virus on the US economy, namely enforcing measures to boost the finances of the states, Biden will most probably pursue a more aggressive approach, similar to the one that many EU countries have followed, through the implementation of new lockdowns in several parts of the country and a mask mandate.

At the same time, Biden has stated that a renegotiation with the Islamic Republic of Iran around the JCPOA is definitely on the table. The Joint Comprehensive Plan of Action or “Iran Deal” has been a long-term process between Iran and P5+1 seeking to terminate parts of the Iranian nuclear program in exchange for lifting economic sanctions from Tehran and assisting the struggling economy of the country.

During the mid-2010s, Joe Biden – as the US Vice President at the time – played a pivotal role in the planning and implementation of the deal; and apparently the new President-elect still deeply believes in it. Trump, to the contrary, has fought every aspect of the deal during his Presidency, calling it the “worst deal ever negotiated”.

A potential renegotiation with Iran would not be an easy path, as Trump’s backing off from what was agreed and the likely election of a hardliner in the place of Iranian President Hassan Rouhani by the summer of 2021 could further complicate an already flawed relationship.

If Tehran comes to an agreement with Washington and the sanctions are lifted, then we should anticipate millions of barrels of Iranian oil finding their way back to the global markets daily, further deteriorating the problematic supply and demand equilibrium. Regardless of the outcome of the negotiations though – which are expected to run in the long-term anyway – the very fact that Biden is willing to restart the talks with the Islamic Republic will likely create additional concerns and push the oil prices even lower in the near future.

How Might OPEC+ React to an Oil Collapse?

Under the current circumstances, it is likely that we are due to face another perfect storm for oil prices on a global scale in the near future. In early December, OPEC is scheduled to meet and discuss the Organization’s strategies, in order to mitigate the impact of the another sharp downtrend in the demand of the petroleum products.

OPEC+ had previously implemented a supply cut of 9.7 million barrels per day to tackle the unparalleled challenges, posed by the COVID-19 crisis. This decrease – which started on May 2020 – was limited to 7.7 million barrels per day by August 2020 with an additional scheduled supply boost of two million barrels per day in January 2021; apparently the January boost has been currently paused, considering the new facts.

This step has temporarily provided some support to the fluctuating prices but would have minimal impact in the months to follow. Predicting that the new COVID-19 wave will have many similarities with the first surge of the virus, it is highly likely that we will face another oil crisis in the near future, sending WTI prices below 30 USD per barrel by early 2021.

This is the most probable scenario, unless there is a breakthrough development on the COVID-19 front – like the Pfizer/BioNTech’s latest vaccine announcement which gave an impressive 10% boost to WTI- or OPEC+ decides to proceed with radical moves, sharply cutting further the global supply in order to manipulate the oil rates; still such a move would put at risk the viability and the long-term outlook of petroleum-based economies, especially those of the rich monarchies of the Gulf and thus any such bold actions are unlikely to occur.