The oil price rallies – but a full recovery is a long way off

Fields in the North Sea are becoming uneconomical © Getty

(Image credit: kofisk oil production platform, the North Sea © Jan Hakan Dahlstrom/Getty)

published 5 June 2020

US futures plunged below zero in April due to Covid-19’s destruction of demand and a US-Saudi price war. Yet oil then staged an 88% rally during May.

Slowly reopening economies and the recent producers’ deal to cut output by ten million barrels per day in May and June – a deal that this week looked set to be extended – have stabilised the market. Brent crude continued its rally early this week, eclipsing $40 a barrel.

The recovery still leaves the industry and the countries that depend on it in a difficult spot, says Ed Clowes in The Daily Telegraph. Many US shale drillers need prices above $50 to survive. Distressed debt in North American energy tops $190bn. Saudi Arabia has been forced to bring in tough austerity measures to balance the books, slashing benefits and effectively tripling VAT. Lower prices saw Russian GDP contract by 28% in April. Closer to home, some analysts warn that the shakeout could “accelerate the death of the North Sea”, where fields are becoming uneconomical.

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The most bullish analysts think the supply glut could end in weeks, writes Ellen Wald for Barron’s. Yet economic reopening is just the first stage on the path to more normal demand for the word’s favourite commodity. Fear of the virus remains widespread, meaning many are still avoiding travel and leisure. The market must also contend with the scarring effects of a deep recession. The journey back to pre-crisis levels of oil demand will be a long one.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.