The impact of the COVID-19 pandemic hammered the oil industry in 2020, forcing U.S. oil prices to go negative for the first time on record. In a matter of hours on April 20, the May 2020 contract futures price for West Texas Intermediate (WTI) plummeted from $18 a barrel to around -$37 a barrel.
Oil producers were faced with a glut of crude oil that left them scrambling to find space to store the oversupply. Brent crude oil prices also tumbled, closing at $9.12 a barrel on April 21, a far cry from the $70 a barrel crude oil fetched at the beginning of the year.
The plunge of U.S. oil futures into negative territory was short-lived. But the collapse in demand was so fast and volatile that it led many people to question whether oil would be able to fully recover in 2021. In this article, we review the key factors that impacted oil prices in 2020.
- In 2020, worldwide demand for oil fell rapidly as governments closed businesses and restricted travel due to the COVID-19 pandemic.
- An oil price war between Russia and Saudi Arabia erupted in March when the two nations failed to reach a consensus on oil production levels.
- In April, an oversupply of oil led to an unprecedented collapse in oil prices, forcing the contract futures price for West Texas Intermediate (WTI) to plummet from $18 a barrel to around -$37 a barrel.
- By the summer of 2020, oil prices began to rebound as nations emerged from lockdowns and OPEC agreed to major cuts in crude oil production.
- By year-end, optimism about the planned rollout of multiple COVID-19 vaccines buoyed the market; in November, Brent crude oil spot prices increased to an average of $43 a barrel.
- WTI finished 2020 at a price of $49 per barrel while Brent crude finished the year at a price of $51 per barrel.
Factors Leading to the 2020 Oil Price Drop
The COVID-19 pandemic triggered an unprecedented demand shock in the oil industry, leading to a collapse in oil prices. Demand for oil cratered as governments around the world shuttered businesses, issued stay-at-home mandates, and restricted travel.
While oil prices started strong in January, by April the impact of reduced economic activity created an oversupply and prices plunged dramatically.
Adding to the freefall in oil prices was the oil price war between Saudi Arabia and Russia, initiated in March after the two countries failed to agree on oil production levels. The month-long price war ended in April when the Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed to cut overall crude oil production by 9.7 million barrels per day for an initial period of two months starting on May 1. This represented the single largest output cut in history. Oil production would be limited to 7.7 million barrels per day starting on July 1 and running through Dec. 31, 2020.
OPEC's failure to quickly cut oil production to respond to lower demand only added to the volatility and price declines the oil industry experienced during the early part of the year. Despite the OPEC agreement to reduce production levels, crude oil prices reached some of their lowest levels in more than 20 years by May 2020.
The 1st Half of 2020
During the first six months of 2020, market uncertainties persisted for all energy sources, including liquid fuels, electricity, coal, natural gas, and renewables. High levels of inventory forced Brent crude oil spot prices down from a monthly average of $64 per barrel in January to only $18 a barrel in April.
As summer approached, however, the oil markets started to shift as nations began to emerge from their lockdowns. For the month of June, Brent crude oil spot prices averaged $40 per barrel, an increase of $11 per barrel from May's average. Production cuts by OPEC and their partner countries (OPEC+) contributed to the decrease in global oil supply and a stabilization of oil prices. In June, OPEC announced that they would extend their deepest production cuts through the month of July.
The 2nd Half of 2020
In the second half of the year, oil prices continued their rebound from April lows. As the year progressed, market expectations grew that OPEC would continue to limit or delay production increases slated for the following year. As expected, on Dec. 3 OPEC and its partner countries announced they would voluntarily adjust production by 0.5 million barrels per day from 7.7 million barrels per day to 7.2 million starting January 2021.
Optimism about the planned rollout of multiple COVID-19 vaccines also buoyed the market. In November, Brent crude oil spot prices increased to an average of $43 per barrel, an increase of $3 a barrel from October's per barrel average. WTI closed out 2020 at around $48 per barrel while Brent crude finished the year at around $51 a barrel.
The Bottom Line
Oil prices plunged in the spring of 2020 in response to fears about the rapid spread of COVID-19. This triggered a shock to global economic demand amid the backdrop of an escalating oil price war between Russia and Saudi Arabia, two major oil producers. The May futures contract for a barrel of WTI sank into negative territory for the first time ever in April 2020 as oil producers desperately tried to unload crude oil into a market that was suddenly massively oversupplied. The glut spurred Russia and Saudi Arabia to end the price war, and prompted OPEC and its allies to agree to production cuts. But while oil prices began to rebound from their historic lows, the failure to act swiftly kept prices low for most of the first half of the year. It was not until the second half of the year that prices mounted a sustained rebound amid further production cuts and a gradual reopening of world economies.