The White House promised to bolster oil prices by filling up the Strategic Petroleum Reserve, and the Federal Reserve cut interest rates yesterday to nearly zero, but the oil industry is still bracing for a long downturn as the coronavirus pandemic raises the risk of a recession.
President Trump made the SPR announcement at a White House news conference Friday as part of a broader plan that included a national state of emergency and as much as $50 billion in relief funds.
“We are going to fill it right up to the top,” Trump said of the reserve (E&E News PM, March 13).
But oil companies have fewer options than in past price plunges because many of them began running leaner operations after the last oil downturn, which lasted from 2014 to 2016, analysts say.
Further, the government may not be able to buy enough oil to prop up the oil market, Daniel Yergin, a Pulitzer Prize-winning oil historian, said at a meeting of the Secretary of Energy Advisory Board, which was held Friday before Trump announced the oil-buying plan. Emergency measures to stop the spread of the new coronavirus, which causes COVID-19, will likely cut into the demand for gasoline and other fuel, he said.
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There have been many cases of an oil price collapse and competition for market share, “but I can’t think of any one that was in the context of a larger global epidemic,” Yergin said.
“Low gasoline prices and low oil prices don’t do much when schools are closed, when people are canceling all their trips, when people are working from home. You’re not going to get economic activity,” he added.
Trump’s emergency declaration also gives state and local governments more support and legal authority to restrict travel and impose lockdowns — which will in turn reduce oil consumption, Per Magnus Nysveen, head of energy research at the data firm Rystad Energy, said in a note.
“This new step in combatting the virus will alone erase several million barrels per day from oil demand over the next couple of months, and dragging down global oil demand far into negative numbers for the year,” Nysveen wrote.
The comments came as a survey by the University of Chicago’s Booth School of Business reported that the effect of the coronavirus could push the U.S. economy into a major recession even if the virus’s mortality rate turns out to be similar to that of other illnesses like the flu.
On Saturday, Spain, France and other European countries announced tighter restrictions on public gatherings, and Germany was preparing to close some of its borders today, according to the Associated Press.
Those actions happened faster than expected and will cut even further into global oil demand and economic activity, Nysveen wrote in a follow-up note Saturday.
“The annual impact could clearly take us below 2% year over year growth, which the International Monetary Fund identifies as a common threshold for ‘global recession,'” he wrote.
The Federal Reserve cut the federal funds interest rate — the rate that banks charge each other for overnight loans — to a range between zero and 0.25%. The Fed also cut the discount rate — the rate it charges banks to borrow federal funds — to 0.25%, a drop of 1.5 percentage points.
On a conference call, Fed Chairman Jerome Powell said the central bank may use more tools to stimulate the economy, depending on how the epidemic progresses.
The price of crude jumped on the Trump announcement Friday to about $33 a barrel, but it was still down almost 20% from the previous week, and about 45% since the beginning of the year. Prices began falling again yesterday.
