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

Steve Hendrickson, President of Ralph E. Davis Associates, has seen his fair share of turmoil in the energy industry over the past 30 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.

Several factors contributed to the issues now facing the oil market, according to Hendrickson. The first is a supply and demand problem. The US produces 11-12 million barrels of oil a day when, several years ago, it generated four million.

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 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 over-flooded, storage is filling up to capacity.

Hendrickson says oil producers have begun shutting in 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.

For the latest insight on the oil and gas industry, head to the Opportune LLP website here.

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