What’s Going On in the Oil Industry?
The energy sector has had a rough couple of years. Even the crude oil industry — typically a stalwart even in tough times — has seen volatility during the global pandemic. Turbulence is increasing as we move into autumn. In August, crude’s price per barrel slumped on low demand. But it rallied in early September, and now, it’s climbing even higher in what appears to be a prevailing trend.
What’s causing chaos in the oil industry? How will it affect the downstream manufacturing industry in the final quarter of 2021?
COVID-19 continues to disrupt industry
For a brief time early this year, it seemed as though the global economy might be on the road to recovery. But the rise of the delta variant shattered those hopes. Several countries reenacted travel restrictions, and even closed ports, to mitigate the spread of the new strain of COVID-19 — which meant significantly less demand for oil. At the peak of summer, oil’s demand dropped sharply when it should’ve risen, and on August 20, the crude oil market reported seven straight days of losses.
Francisco Blanch, a commodity and derivative strategist for Bank of America, recently commented on the delta variant’s effect on the fuel industry, “The oil market has quickly noticed that the Delta variant is a growing problem and a potential hurdle to a mobility/fuel demand recovery.”
Analyst outlook is only one factor contributing to uneasiness in the oil industry. Some of the world’s largest suppliers and consumers are already taking steps to brace for volatility.
Last year’s troubles continue through 2021
The current crude oil situation might be reminiscent of last year’s economic shutdown, but 2020 was much worse. Oil inventory rose exponentially with the huge slump in demand. The slump isn’t as bad this year, but there’s concern the delta variant could deal the oil industry another massive blow. And the fallout could have significant repercussions for the manufacturing sector.
A trajectory toward demand destruction
Winter is shaping up to be a difficult season for industries reliant on crude oil. Prices will likely continue to rise, and shortages are sure to occur. Demand is expected to skyrocket this winter, and experts, including those at Morgan Stanley Bank, believe it may lead to demand destruction; “Oil prices have disconnected from the marginal cost of supply. Instead, they are traveling to the level where demand destruction kicks in, which we estimate at $80/bbl. This remains our thesis.” For reference, oil has climbed from $48/bbl. at the start of the year to $76/bbl. as of September 2021.
If demand peaks and supply shortages occur as predicted, the United States will likely have to dip into the national reserves, and that could have disastrous consequences in 2022.
Manufacturing needs to brace itself
Manufacturers reliant on crude oil or crude adjacent products need to brace for a bad winter. With the cost of crude set to rise, and supply constraints on the horizon, there’s going to be a squeeze. For many manufacturers, hardship is inevitable. Others will have an opportunity to explore innovation and smarter supply chains. In either case, Big Oil’s struggles will have an effect.