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Oil Prices To Fall Further – Here’s Why

Monday, 27 April 2020 | 15:00

Benchmark U.S. crude oil prices dived into negative territory on Monday, due to a collapse in demand caused by the Coronavirus pandemic and a lack of storage capacity for excess supply. While June futures contracts for WTI crude and prices for Brent crude remain positive at levels of over $20 per barrel, the pain for the oil prices may be far from over, given that transportation and industrial activity, which together account for more than 90% of crude oil demand, are likely to remain depressed in the near-term. Our analysis U.S Oil Consumption by Sector shows underlying numbers across residential, commercial compared to transportation and industrial consumption.

Transportation & Industrial Demand (>90% Of Consumption) Collapse

Transportation of all forms accounts for roughly 69% of U.S. oil consumption or roughly 14.16 million barrels per day. This demand is set to plunge, as millions of Americans continue to work from home and are unlikely to drive to vacations till the pandemic eases or a vaccine is developed and deployed. For instance, overall daily national traffic volume for consumers, local fleets, and long-haul trucks were down 38% for the period between March 21 and 27, compared to Feb. 22 and 28, per Transportation data provider INRIX and it is likely that traffic has only declined further over April. Although oil consumption and miles driven often picks up as prices decline (drop in oil prices in 2015 was associated with vehicle-miles growth rates around 2%) things are likely to be different this time around as the pandemic restricts activity.

The demand for air travel has also plunged. According to the U.S. Transportation Security Administration, passenger screenings at airports have dropped by roughly 95% in the month of April, compared to early March. Just about 105k passengers were screened across U.S. airports on April 19th, versus about 2.2 million on March 1. Industrial demand for oil is also likely to take a big hit, as the economy enters what is likely to be a deep recession. The industrial sector accounts for 25% of U.S. consumption or roughly 5.1 million barrels per day.

Production Declines Will Eventually Support WTI Prices

U.S. drilling activity has dropped significantly, with the number of oil rigs operational down to 438 in mid-April from 825 a year ago, per Baker Hughes BHI, and this number is only likely to drop further in the coming weeks with the current price rout. Close to two-thirds of the oil produced in the U.S. comes from shale oil wells, which typically have shorter production life cycles, with fast decline rates. This means that the weaker drilling activity, coupled with natural declines in production rates for wells, could start to reduce supply, helping prices. This is possibly a reason why June futures prices for WTI crude are holding up a little better with contracts being priced at a little over $20 per barrel as of Monday. However, this may not hold true if there is persistent reduced demand from both transportation and industrial use.
Source: Forbes

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