The Oil Market, 2020 Black Swan, and A Third Virus Wave


Friday, December 25, 2020 / 7:30 AM / By Funsho Idowu, Proshare research / Header Image Credit: Economic Times/Ecographics

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It has been a rollercoaster year for the oil market in 2020 as unprecedented events came to the fore with devastating effects on the global economy. Oil as a major source of revenue for some countries and an essential commodity took a big hit from the emergence of the Black Swan, leaving most economies in a precarious situation.

The 2020 Black Swan

Towards the end of December 2019, the coronavirus event occurred, creating a whirlpool of unpredicted and perhaps unpredictable outcomes. By the start of 2020, the virus (considered to be a black swan) was widespread, spreading from China to other parts of the world. The pandemic ravaged oil demand globally as countries were forced to introduce lockdowns, and other forms of restrictions to prevent further contagion. By April 2020, about half of the world's population was under lockdown, with more than 3.9 billion people in more than 90 countries or territories having been asked or ordered to stay at home by their governments.

In March 2020, oil prices had dropped to as low as US$25 per barrel from US$68 per barrel in December 2019. In April, the first time oil price futures turned negative, producers began paying buyers to take the commodity off their hands for fear of disappearing storage capacity (see table 1 below).

Table 1: Brent M-o-M Performance( Jan- Dec)



Prices ($/bbl)

% Change(M-o-M)






































Russia- Saudi Arabia Sword Fencing

Another factor that contributed to the huge fall in oil price was the market share war between Russia and Saudi Arabia, which was triggered in March by Saudi Arabia in response to Russia's refusal to reduce oil production to keep prices up at what was considered by the Arab kingdom to be moderate. The economic conflict resulted in a sharp drop in oil prices over Q2 2020. The price war was initiated by a break in communication between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over proposed oil-production cuts amid the COVID-19 pandemic. Russia walked out of the agreement, leading to a break in the alliance.

OPECplus Double Dips

To manage the price slump, OPEC and non-OPEC allies agreed in April that it would cut supply by 9.7m barrels per day between May and June 2020. The output pact achieved its goal and in May 2020, oil prices started to inch up +43.12% and settled at $41.02/bbl in June from as low as $21/bbl in April 2020 (see chart 1 below).

Chart 1Brent Crude Price Movement( Jan- Dec)

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Source: Bloomberg, Proshare Research

With Oil prices steadily rising after the record cuts, OPEC and non-OPEC allies agreed to scale back the cuts to 7.7m barrels per day in August.

In October 2020, Brent Crude oil slumped to its lowest price since May 2020, as new lockdown measures came into force across Europe and some parts of the United States of America (USA) to fight the second wave of the pandemic.

OPEC and non-OPEC allies met in December to discuss 2021 oil output policies given the weak global oil demand outlook. On Thursday, December 3rd, 2020, OPEC and Russia agreed to slightly ease their deep oil output cuts from January by 500,000 barrels per day(bpd). The increase implies OPEC and non-OPEC allies would move to cut production by 7.2mbpd or 7% of global demand from January compared with the 7.7mbpd agreed on in August 2020.

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Birth of A Vaccine

The oil rally has accelerated in the last two months after several pharmaceutical companies announced strong responses to vaccine trials, inspiring hope that economic recovery and pre-pandemic life would return shortly.

Swifter-than-expected vaccine distribution plans sent positive sentiments to the oil market despite the American energy agency, EIA, reporting earlier in December 2020 that there was a massive crude oil inventory build-up of 15.189 million barrels for the week to December 4. The rise in crude inventories came close to the largest crude oil build-up ever, which was recorded earlier this year for the week ending April 10, when the U.S. Energy Information Administration(EIA) reported a 19.25 million barrel stock up.

Ever since the first vaccine news spread, the oil price has recovered from historic lows reached in April 2020.

Third Wave - The New Ninja Virus

Despite the new output curbs by OPEC and its allies and the prospective vaccine rollout, oil markets remain jittery over the recovery of oil demand as a new, highly infectious variant of the novel coronavirus has hit Britain. The discovery tipped a steady domino of border closures in neighboring European countries like Ireland, Germany, Belgium, and France as well as other countries outside Europe.

Last week, South Africa announced the discovery of a new genetic mutation of the disease. On the heels of its identification, countries around the globe began closing their borders to South Africa.

An Eye on Tomorrow

The third wave of COVID-19, if not tackled swiftly, could send oil prices crashing to as low as $45 per barrel even with existing output curbs by OPEC and its allies.

According to the World Health Organization (WHO), the new variant of the virus has so far been identified in Denmark, the Netherlands, Northern Ireland, and Australia.

Hopefully, the Pfizer and Moderna Covid-19 shots could be effective against the new strain of the virus, but the jury is still out.

Starting from January 2021, OPEC and its allies will further ease its supply restrictions by adding an extra 500,000 barrels per day to the global oil market and agreed to meet every month to discuss new policies.

All things being equal, the oil price is expected to hit pre-COVID levels by Q4 2021.


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