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Coronavirus & Volatility In The Oil Markets: An Endless Cycle

Earlier this year, amidst the chaos created by the rampant spread of coronavirus throughout the world, many countries also started to experience financial turmoil, potentially due to strict economic shutdowns. To add insult to injury, April presented a new conundrum for many countries: oil prices plummeted to historic lows, falling into negative territory for the first time in history. This meant that oil producers would actually have to pay buyers and traders to take oil from them, in order to mitigate storage issues. Since then, partly due to agreements reached between larger oil producers such as Russia, OPEC, etc., oil prices are slowly starting to recover.

An interesting corollary to the volatility in this market is its relationship to Covid-19. Though not obvious at first sight, the global pandemic has contributed to volatility in the oil markets, and vice-versa— creating a self-propagating loop. For one thing, the travel industry worldwide has been severely restricted for the majority of the year thus far, with airlines, cruise ships, and other travel services largely grounded. Furthermore, for nearly 3 months, most countries have gone into domestic lock-downs, entailing less road traffic and travel within countries, let alone across borders. All of these factors have likely caused a drop in demand for fuel, thus leading to an oversupply which naturally deflates prices.

Needless to say, these issues likely won’t be resolved anytime soon. Much of the recent optimism around recovering and increasing demand in the oil market has been centered on larger consumers easing lock-down restrictions in light of more promising control of coronavirus infections. These include countries like China, India, and the USA. However, these very countries are now facing concerns of a coronavirus resurgence. China is quickly hoping to quell a possible second wave of infections, while other countries are still trying to “flatten the curve” of their initial breakouts. However, should infection numbers continue to rise, governments will likely be forced to resume strict lock-down measures once-again, and the danger to oil demand will resurface.

Conversely, just as oil volatility may be affected by the spread of coronavirus, the market ramifications of a depressed oil market may equally impact the spread of the virus. The reality is that many countries that are deeply dependent on oil revenue also seem to be some of the hardest hit by the virus. For example, many South American countries have robust oil-industries that contribute significantly to the economic prowess of the region. However, recent reports indicate that South America may be the new epicenter for coronavirus. On the other end of the world in the Middle East, another historically oil producing region, some countries are reporting record increases in infections and a potential second wave.

Once again, if the spread of the virus isn’t controlled, these countries will be forced into a renewed lock-down. But therein lies as a new problem: given the massive economic slump these oil-revenue dependent countries are facing due to the oil-crash, how well can their economies tolerate another widespread shutdown, similar to those instituted during the start of the pandemic (around March and April)? Indeed, though some countries may be able to weather another economic slowdown, some other regions may be hesitant, as economic collapse may not be a farfetched possibility. Thus, volatility in the oil markets may indeed be a systemic driver in preventing an ideal approach to lock-downs, which would inevitably lead to poor infection control.

Indeed, there is perhaps an unforeseen, yet unfortunate relationship between the oil markets and coronavirus. While countries struggle with the ever tumultuous balance of managing their economies with lock-down measures, one thing is certain: this pandemic has brought forth unprecedented conundrums, and will likely continue to do so in the coming months.

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