Mood Turns Sour, along with Oil Prices — There’s too much Oil Around

The mood’s turned sour. Overnight, markets fell.

And so did oil prices.

West Texas Intermediate has dropped around 4% and closed at US$39.29. Brent Crude Oil has fallen 4.5% so far this week. And as I write this, it’s trading at US$40.57.

The fall in oil prices is pulling Aussie oil companies down. At time of writing, Oil Search Ltd [ASX:OSH] is down by 3.76%, Woodside Petroleum Ltd [ASX:WPL] fell by 3.41% and Santos Ltd [ASX:STO] is down by 3.15%.

What Happened to the Oil Price?

A bunch of bad news have hit the oil price all at once.

For one, the idea of a quick recovery is starting to fade away as infections increase in Europe and the US.

An increase in infections means less movement, more lockdowns and a decrease in economic activity, which is all bad news for oil demand.

Also in question is if there will be more stimulus going into the US economy, with a US$2.2 trillion spending plan on the pipeline.

There’s also the fact that commodity traders don’t expect much of an uptick in oil demand or prices above US$40 anytime soon.

From Reuters:

The heads of the world’s largest trading houses on Tuesday predicted a tepid recovery in oil demand and flat prices over the coming months or years due to the coronavirus pandemic but said peak oil demand would come only in the next decade.

The chief executives of Vitol, Gunvor and Mercuria also told the annual FT Commodities Global Summit they would invest more in renewables.

Russell Hardy, who runs the world’s biggest trading house Vitol, said he had “modest expectations” for oil prices as he expected consumption to stay broadly flat until next summer.

And then there’s the fact that Libya has restarted oil production and exports after months of having their ports blocked because of an internal war. Libya has gone from producing 90,000 barrels a day to 250,000 barrels per day.

In short, there’s too much oil around

With so much oil around, the perspective of lower demand and a push towards renewables, don’t expect oil prices to rebound anytime soon.

It’s why we think there are better investments out there, especially if you are looking for dividend plays.

Check out our Rum Rebellion Editor Greg Canavan’s free report ‘Five Dividend Stocks set to Thrive in the Post-Pandemic Era’.

You can access it here.

Best,

Selva Freigedo


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 Port Phillip Publishing’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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