If history is a guide, an oil price boom is coming after the pandemic-generated crash.
While the near-term demand picture is highly uncertain, as people reconsider their travel and work habits, this latest bust, the worst of them all, is unlikely to hasten the demise of oil.
“The only way to get away from the boom-bust cycle is to get off of oil,” said Bob McNally, president of Rapidan Energy Group and the author of a book on the topic called Crude Volatility.“That’s really tough because there are no scalable substitutes. As a result, we expect a thirstier world will collide into insufficient supply, and crude prices will have to rise sharply to balance the market.”
Oil supply will take longer to return than demand as drillers shut-in a record amount of production, companies cut spending on new investments, and the U.S. shale revolution slows.
“As demand rises and it becomes clear that producers over-cut, a roaring oil market will develop,” said Dan Eberhart, CEO of the drilling services company Canary and a donor to President Trump.
Few are expecting $100 per barrel oil, a level that was commonly reached during previous economic recoveries but hasn’t been met since summer 2014. Oil prices have increased in recent weeks, with the U.S. benchmark closing this week at $24.74 per barrel after briefly trading below zero last month for the first time. Joe McMonigle, president of the Abraham Group, an international strategic consulting firm, said he expects oil prices to reach around $45 per barrel as early as the third quarter of this year as economies are freed from stay-at-home orders.
He noted oil prices approached $80 per barrel as recently as last year.
“I hesitate to talk about $100 oil,” said McMonigle, a former Energy Department chief of staff in the George W. Bush administration. “But when the economy comes back, you will eventually get to that bust to boom cycle.”
At first glance, the outlook for oil demand is cloudy, and there are countervailing factors that might determine its future. China, one of the two biggest oil consumers with the United States, is back to rush-hour traffic levels after beating the worst of the virus.
Driving is picking up in the U.S. as nearly half of states have begun to open stores, beaches, and restaurants. But flying remains risky and is discouraged. For many, telecommuting is normal now and could become more routine in the future. Mass transit, powered by electricity, not oil, could see a hit as people avoid tight spaces. That means more cars on the roads.
“You have trends both negative or positive for demand, and it’s anybody’s guess which way that pushes demand,” said Jim Krane, energy geopolitics fellow at Rice University’s Baker Institute. “I have seen nothing that tells me there will be a permanent drop in oil demand.”
Global oil demand is not expected to reach pre-pandemic levels before the end of the year, the International Energy Agency projected last month. But after that, it expects oil demand to experience “robust” growth to 2025, absent major changes in government policies, before seeing slower growth and reaching 106 million barrels per day in 2040. The world consumed 100 million barrels per day of oil before the pandemic.
“Oil is still the only game in town when it comes to moving around the planet, and until that changes, we are going to be using it,” Krane said.