This Doesn’t Bode Well for Oil Prices…

Oil prices are rising.

West Texas Intermediate (WTI) hit US$40.65 on Thursday, after unemployment dropped to 11.1% in the US. The fact that some people in the US may be getting back to work has brought back some optimism.

At the same time, demand for oil is rising, slowly, as countries start to open back up.

From Oil Price:

Oil inventories remain above the five-year average for this time of the year, but refinery runs for the past few weeks suggest demand for fuels is increasing, albeit slowly. 

Last week, these averaged 14 million bpd, compared with 13.8 million bpd a week earlier, and 13.6 million bpd two weeks earlier.

But, don’t count on an oil prices rebounding back to previous levels anytime soon…

As economies open back up, the hope is that oil demand will increase. But this increase in demand could be short-lived.

First, virus numbers are increasing in several countries like US, Brazil, and India. Others are delaying the reopening of the economy. Here in Australia, some parts of Melbourne are already back into lockdown and the idea of domestic travel is fading, with Victoria and New South Wales closing their border.

Oil still makes much of our global energy consumption, with the transport sector making around 60%. With barely any demand for airline travel or car travel, it doesn’t look like demand will be picking up anytime soon. Even with countries reopening, some changes from the pandemic are likely to stick, with people working from home more.

And then there is supply.

OPEC-Plus agreed to cut oil supply after oil collapsed by 9.7 million barrels a day, about 10% of global output. That deal ends in August, so it remains to be seen if this will continue.

All this makes it very unlikely for oil prices and demand to increase anytime soon.

Oil companies know it…

In mid-June, BP said it’s writing down its oil and gas assets by as much as US$17.5 billion, as demand and oil prices drop from the pandemic.

So is Royal Dutch Shell, who last week warned it’s writing down the value of its assets by between US$15 and US$22 billion in the second quarter.

What could happen next?

The coronavirus is expediting trends. The pandemic is hitting every country and almost every industry. It doesn’t look like oil prices will be recovering soon.

In fact, oil may never be the same again. That’s why, we think there are better investments out there.

Check out editor Greg Canavan’s new report: ‘Five Bounce Back Stocks to Consider during the Market Crash’. In this free report, Greg gives you five stocks he believes will survive the pandemic…no matter how it all plays out.

You can access this free report here.

Best,

Selva Freigedo,
For The Rum Rebellion


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


The Rum Rebellion