The high unemployment and a weak GDP sent gas prices plummeting to a multi-year low. Despite cuts from major oil producers, the global crude supply is expected to be on average around 4.5 million barrels per day (b/PD) in excess of demand for the year, with the month of May witnessing as much as 13 million b/PD of excess supply.
With COVID continuing to weigh on the U.S economy, demand for goods and services remains muted, as businesses continue to reel due to the countrywide lockdown, which has resulted in far-reaching economic stagnation. The latest figures show unemployment hit a multi-year high, with figures coming in at 14.7%. Adding to the economic woes, protests have only further hampered the recovery
The excess supply has resulted in a massive glut of oil, which is weighing down prices, with Brent trading at $40 a barrel and WTI at $36. Analysts expect gas prices to remain range-bound, with little relief expected from the economy or suppliers.
Despite the global economy weighing on demand oil-producing countries have been reluctant to cut output. The lack of consensus among OPEC, which expects demand to cross previous highs on the back of low prices, has only added to the issue. Key players such as Saudi Arabia and Russia remain key if oil prices are to come back up, with smaller OPEC players likely to follow their lead in terms of future policy. Furthermore, shale producers have been reluctant to cut output as well, with similar expectations of a recovery later this year.
Key indicators such as the GDP and PMI (purchasers managing index), could offer an insight into what we can expect from gas prices. With the latest PMI figures coming below 40, (a figure of 50 indicates expansion), there is little expectation of sustainable recovery any time soon. With the US economy expected to contract anywhere from 3.6%-7% for the year, oil prices will likely remain under pressure for 2020.
According to the IMF, global GDP could contract by as much as 3% for the year. While countries globally have been stimulating their economies at record levels, the effects of these stimulus programs remain uncertain with demand remaining tepid as of now.
Along with the U.S. both the EU and China remain key to global crude demand, as economies limp back to normalcy after shutdowns that have cost most countries dearly.
The EU which has been a center of the COVID epidemic faces a historic decline for the year, with analyst expectations forecasting as much as a 5% drop in GDP. Germany, which is the biggest economy in the EU, has witnessed its GDP contract by 3.8% in the first quarter. France and Italy, the two other major economies that are already in a recession.Overall, the current economic climate in the region does not paint a picture of confidence.
China on the other hand has been a key source of crude demand, as other global economies struggle. The ability to bring the pandemic under control early has left its economy relatively healthier, as others struggle. China has taken advantage of the lower crude prices by filling up its strategic reserves, thereby bringing on extra demand. Despite the extra demand from both China’s economy and its strategic reserve initiative, there will likely be little to no difference in the eventual outcome on prices in the short term.
Ultimately the cross-linkages between oil-producing nations and what currently seems like over-optimistic expectations are at the crux of the debate, about where gas prices will be in the coming quarters. Until then Americans continue to enjoy the privileges that come with lower gas prices. Many have resorted to filling up on reserves as they take advantage of low prices. Until prices rise again the economy will see tailwinds from the lower prices.
Little did we know almost a quarter ago that a pandemic would rage through the world, crippling supply chains, economies and forcing the masses into a hermit-like state. The forced shutdown of the economy has left many businesses reeling, and many permanently rendered shut.
What seems likely to be a prolonged recovery certainly will play a central role in impeding gas prices from recovering back to their previous levels. Even with some recovery in recent weeks, prices remain well below the recent historical levels.
And with a perfect storm of issues from multiple sources, the trend of low prices as analysts have predicted is likely to remain so for the time being.