Oil Prices Are Waiting To Rise, But Stimulus Will Not Be The Cure

Oil prices continue to linger around $40 per barrel. They have been fairly stable since June, after swinging wildly in the spring. As of this writing, both major oil benchmarks, WTI and Brent, are trading just below $40. Oil prices are sitting around this mark, because oil traders don’t know what is happening with the economy. They don’t know if the big global economies will finally fully open, if the economy is recovering or waiting to sink further into recession, if President Trump or Vice President Biden will win the election, if people will start traveling again soon and if the U.S. government will inject more stimulus into the situation. 

Some speculators and analysts believe that oil prices are waiting to move on news about potential stimulus money from the U.S. government. While the announcement of another stimulus package could energize some speculators to buy oil right after the news, economic stimulus is unlikely to actually revitalize oil demand. If Americans again receive direct stimulus in the form of checks from the government, families that are truly struggling are more likely to use it to pay bills than to buy anything new that would add to oil demand. Families that are not struggling will not change spending habits because of a couple of thousand dollars.

Stimulus from the Federal Reserve that impacts the banks (like quantitative easing and zero interest rates) might encourage buying by professional traders, but it would not solve the demand issue at the heart of low prices since March. Stimulus directly for businesses (like the payroll protection program) would help some struggling businesses survive longer, thus protecting economic activity and oil demand. But PPP only keeps existing businesses going; it is unlikely to add to demand. There is a possibility the airline industry will get its own bailout, but it is hard to see how that will increase demand for flights or jet fuel—it will simply help keep airline employees on the payroll.  

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Moreover, stimulus cannot do much about the continued fear of coronavirus. In the United States, travel is down. Businesses are booking less travel for employees, Zoom and Microsoft MSFT meetings are overtaking in-person sit-downs and conventions and families are thinking twice about trips. Thanksgiving and Christmas are just around the corner. Airline tickets can be purchased cheaply, but the issues stopping people from booking are fear, masks and lack of funds. Few are more likely to book trips if they get a stimulus check. Added payroll protection may keep more people employed—thus adding to the economy and also the use of gasoline—but driving miles alone are not enough to truly drive oil demand.

Oil prices are waiting for demand news, and this is directly tied to the health of the economy. However, agreement on a stimulus bill won’t drive that price hike.

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