Why the low oil prices during the COVID-19 Pandemic, in a nutshell

Back in the 80´s and 90´s gas prices were affected more by the global events than the regular supply and demand. Anything global in the news would make noise and prices would rise and fall accordingly. A lot of price rigging also occur by the mayor producers and their coalitions. Now a days, more and more, we have seen independence from this external event in the way oil prices move. Since the discovery of new oil exploitation technics, like shale oil and others; oil prices have gone more dependent on supply and demand.

When the Pandemic hit at the beginning of the year, lockdowns have shifted the Demand of Oil for transportation with is the two mayor oil consumptions, the other being power generation. But since Power generation grid has moved to renewables. Transport became the main use of oil. Transport went down very rapidly and production did not. Oil wells and production are under contract and will suffer great losses if it stops. Better off storing oil than stop production. So, when both demands went down globally due to transport Halt, and supply going up from continuous production of oil that is being stored. The result is a price decrease in a double effect. High supply- low demand made oil prices hit bottoms never seen in decades.

What should we expect to happen next? Well, first, as lockdowns will be lifted gradually, so will be the increase in demand. We also must consume all that surplus fuel stored. Prices will continue to be low under this scenario for at least the end of the year and probably part of the next year. It all depends on how we get back moving again.

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