Oil Costs Are Ready To Rise, However Stimulus Will Not Be The Treatment
Oil prices are still around $ 40 a barrel. They’ve been pretty stable since June after swinging wildly in the spring. At this point in time, the two most important oil benchmarks, WTI and Brent, are trading at just under USD 40. Oil prices hover around this mark because the oil traders don’t know what is happening to the economy. They don’t know if the big world economies will finally open fully, whether the economy will recover or wait to plunge further into recession, whether President Trump or Vice President Biden will win the election, whether people will be traveling again soon and whether the US government will give the situation more impetus.
WASHINGTON, Sept. 10, 2020 – Nancy Pelosi, Speaker of the U.S. House of Representatives, speaks during a press conference about … [+]
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Some speculators and analysts believe that oil prices are waiting for news of potential US government stimulus money. While the announcement of another stimulus package could encourage some speculators to buy oil immediately after the news, it is unlikely that economic activity will actually revive oil demand. If Americans are again given direct incentives in the form of checks from the government, families who are really struggling will use them to pay bills rather than buy something new that would drive oil demand. Families that have no problems will not change their spending habits because of a few thousand dollars.
Federal Reserve stimuli that impact banks (such as quantitative easing and zero interest rates) could encourage buying by professional traders, but they would not solve the demand problem at the heart of low prices since March. Direct business incentives (such as the wage protection program) would help some firms in difficulty survive longer, thereby protecting economic activity and oil demand. However, PPP only keeps existing businesses going. Demand is unlikely to increase. There is a chance the aviation industry could get its own bailout package, but it’s hard to see how this will add to the demand for flights or aviation fuel – it will simply help keep the airline’s employees on the payroll.
A view of the Los Angeles refinery owned by Marathon Petroleum Corp. in Carson, California, April 25, 2020 … [+]
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Additionally, the stimulus can’t do much about the lingering fear of the coronavirus. Travel is in decline in the United States. Businesses book fewer trips for employees, Zoom and Microsoft MSFT meetings overtake face-to-face meetings and conventions, and families think twice about travel. Thanksgiving and Christmas are just around the corner. Airline tickets can be bought cheaply, but the problems that keep people from booking are fear, masks, and lack of money. Few are more likely to book trips when they receive a stimulus check. Extra wage protection can mean more people are employed – which increases the economy and increases gasoline consumption – but driving miles alone isn’t enough to really increase oil demand.
Oil prices are waiting for demand reports and this is directly related to the health of the economy. However, the agreement on a business cycle calculation will not drive this price increase forward.