Earlier this week, oil prices hit their lowest since May, with the price of Brent Crude falling below $36 a barrel.
The causes behind the decline are simple enough to trace - the price of oil over 2020 has been inextricably linked with global lockdowns. Since the start of the year, we’ve seen the price of Brent Crude swing from a peak of just under $70 a barrel in January, to a low of just over $19 a barrel in April, as the full extent of the coronavirus pandemic became known - a drop of over 70%.
Earlier this year, the Opec+ group of nations agreed to its biggest-ever production cuts of 9.7m barrels a day during May and June, which eased to 7.7m barrels a day in August, in an effort to help lift the oil price. The plan was to ease the cuts from January 2020, but as a result of an increasingly gloomy outlook, Russia and Saudi Arabia are in favour of delaying the increase in output.
With much of Europe now back in lockdown, and parts of the US likely to follow, any rebound inspired by international travel looks negligible. Similarly, demand to heat offices or to fuel the office commute will be down as many of us are back working from home for the foreseeable.
Nevertheless, there are significant differences to the latest round of lockdowns from those which went before.
To start, the global picture has changed. Though the US and Europe are still struggling, there have been marked improvements in parts of Asia, with cases in India falling and China seemingly rid of the virus.
Secondly, the lockdowns imposed in Europe are (so far) less severe than last time. Schools and universities are still open in England, with demand to fuel the morning school run here to stay. Germany’s “lockdown light” is milder still.
Unfortunately, there’s likely to be higher household demand too. Over the spring, blue skies and warm temperatures provided something of a saving grace for many. November, unfortunately, looks like a different beast. The nights are drawing in and the air is cooler. That means higher energy bills for those of us spending more time at home than we otherwise would have. Oil investors will hope that oil used to heat our homes will offset the abandonment of our motorways.
Moreover, cheaper Brent Crude is still good news for some sectors (though not as many as usual). Typically, low oil prices are a tailwind to consumption growth, with benefits for retailers, transport companies and leisure businesses alongside others. While industries such as these will only really benefit once consumers have exited lockdown conditions, low demand should slash costs for supermarkets’ delivery vans, which will be revving up for a bumper winter as many of us resort to online shopping once again.
Current oil prices reflect a pattern we may have to get used to over the coming months. Markets’ instinctive optimism, exacerbated by expectations for life after Covid, will frequently be curtailed by political uncertainties or recurring lockdowns. Hopefully there’s more of the former than the latter.
Five year performance
As at 31 Oct
Past performance is not a reliable indicator of future returns
Source: Refinitiv, as at 31.10.20, in US$ terms
Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.