The current year has been exceptional for financial markets and the global economy and particularly exceptional for the oil markets
Oil markets suffered from a dual shock on both the supply and demand sides at the beginning of this year; a price war coupled with the spread of the COVID-19 pandemic which caused an unprecedented destruction of demand.
WTI futures traded at a negative price for the first time ever as traders panicked about taking delivery of their expiring contracts, while Brent declined more than 85% from peak to trough reaching a low of US$9.21/bbl on April 21st.
Driven by government fiscal spending and central bank accommodative policies to contain the economic consequences of the pandemic, financial markets staged an impressive come back with major indices recouping most of their losses by the first week of June and oil prices partly recovering to the US$35-40/bbl levels.
OPEC and allies managed to strike a deal to cut down supply by a record 9.7 mb/d which was de facto supported by other producers which curtailed production for economic reasons. Global supply dropped by more than 10mb/d, of which OPEC contributed around 6.3 mb/d as at the end of May.
The oil market is facing a complex set of challenges this year. Prices rallied significantly off their lows driven primarily by supply-side optimism. The critical factor in the stabilization of the market remains, however, a full recovery in demand. Something that doesn’t seem to be expected before the end of next year.
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