Global aggregate demand for oil is sagging again as the second wave of the global pandemic sweeps across Europe and Britain and intensifies in the United States. For the third time in 20 years, the bottom has fallen out of oil prices, which will most likely have enormous implications for the economies of the United States, Canada and Mexico, as well as enormous potential geopolitical ramifications.
With global growth likely to contract at a 4.4% pace in 2020, it is not any surprise that the global benchmark for oil, Brent crude, has a front-month contract of $39.70, while the U.S. benchmark, West Texas Intermediate, stands at $37.30. The consensus forecast implies a modest move upward to $39.85 by the end of the year on WTI and to $41.60 on Brent.
The global imbalance between supply and demand will most likely not be resolved anytime soon.
Despite the reduction in the number of oil rigs, it is highly likely that the global imbalance between supply and demand will not be resolved anytime soon. Sagging aggregate demand is inhibiting any significant recovery in global oil prices despite the onset of winter.
Since the start of the year, the price for a barrel of crude has dropped by $21 (a 35% decline) and there are 466 fewer rigs in operation (a 69% decline). Though the price of oil has rebounded, its two-year downward trend remains intact, a byproduct of the drop in demand for fossil fuel energy brought on by the U.S. trade war and the subsequent global manufacturing recession that was subsumed by the coronavirus outbreak and global economic shutdown.
As to the impact on the domestic economy, the oil industry, like other manufacturers, directly supports suppliers and indirectly supports downstream services that rely on the income and spending of oil workers.
We have already observed the economic and social damage caused by the offshoring of manufacturing. Given the potential damage to household balance sheets from the paring down of the oil industry, the economic repercussions seem altogether avoidable.
As to geopolitical repercussions, a collapse of crude oil prices will present problems for Russia and the Middle East as well as to North African oil-producing economies. It will also add to the Venezuelan catastrophe, prompting a call for production cuts by other OPEC members.
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