Oil: prices hit 20-year low, what's next for Crude Oil?

When the markets opened on Monday morning, the price of oil reached its lowest level in over 20 years, as the markets reached $15 a barrel. It was the first time since 2000 that the market traded at this price. The virus situation caused demand for this commodity to drop to its lowest level in history, as much of the world is still in containment, while the fight against the "invisible enemy" continues.

This lack of demand in energy markets has created a stockpile of full barrels, which was one of the main factors in OPEC's recent agreement to reduce production. Generally speaking, in a supply and demand economy, a decrease in supply increases demand. Conversely, an increase in supply leads to lower prices and lower demand due to increased competition.

However, this is not what is happening in the oil sector.

What's next for the oil market?

The demand for oil is currently non-existent because most of the sectors that consume oil are at a halt. Currently, the travel sector is one of the sectors most affected by the situation. Most of the world's nations have strict guidelines in place which mean that most daily domestic travel has had to be restricted to a strict minimum. As a result, the roads in most cities around the world have become empty, which has reduced the need for oil.

By moving away from the roads and into the skies, domestic and international travel bans have resulted in the complete closure of several countries, except for repatriation flights. With many countries having extended their containment in May, it could be a few months before air travel returns to normal levels.

Agencies such as IEA report that "even assuming that travel restrictions are eased in the second half of the year, we expect global oil demand this year to fall by 10 million barrels per day compared to last year, erasing nearly a decade of growth".

Why are the oil cuts not working?

Cuts that many thought would be a cure have so far had the opposite effect. Prices have dropped by over $9 since last week's agreement. Many believe that Saudi Arabia has continued to supply oil at lower rates to Asian countries, which is one factor.

However, as the IEA says, reductions in supply don't mean that demand will increase. With markets running out of places to store the commodity, many believe that the effect of the recent agreement may not be felt until the travel bans and confinements begin to wear off.