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A Shock Like No Other: The Impact of COVID-19 on the Oil Markets

The outbreak of COVID-19 has been accompanied by widespread declines in global commodity prices. The pandemic represents a unique shock that has a major impact on both the demand and supply of commodities.

The real price of oil has plumbed new depths, lower than it has been at any point since the first oil price shock of the early 1970s. 

This is particularly ominous as it comes after the deal to cut oil production, brokered by President Trump to much fanfare last week. Oil-producing countries that have strained public finances will suffer badly as a result. And, depending on the shape of the post-crisis world, this could be the new normal for oil prices into the medium term.The price of a barrel of WTI oil for May delivery fell into negative territory for the first time in history as refiners were forced to pay for others to take their excess inventory due to a lack of storage space. The price of a barrel of WTI for June delivery remained in positive territory, trading close to $20, but has declined by 65% this year and 30% over the past week. Developments in the oil market highlight the risk of severe dislocations in financial markets due to COVID-19.

Oil markets have been most affected, given the collapse in travel arising from mitigation measures, and have seen an unprecedented collapse in demand and steepest one-month decline in oil prices on record. Metals prices have also fallen, albeit less than oil, while agricultural prices have been much less affected so far given their indirect relationship with economic activity.

Over the short-term, in addition to weaker demand, disruptions to supply chains could cause dislocations in commodity markets, with food security a key concern. The ultimate impact of the pandemic will depend on its severity and duration, but it is likely to have lasting implications.

Changing consumer behaviour could cause a structural shift in work patterns, reducing travel and demand for fuel. An unwinding of complex global value chains may occur, which could reduce commodity demand. For policymakers in EMDEs, the plunge in oil prices provides an opportunity to eliminate energy subsidies.

US retail sales dropped by a record 8.7% in March, yet the share of non-store sales rose to an all-time high. With high streets across the developed world already struggling to fend off the online competition before the outbreak of the pandemic, their demise could have important long-term ramifications for both consumers and the broader economy. 

In particular, there is a significant risk that COVID-19 and the persistently low interest rates across the world will further enable firms to pursue ‘winner takes all’ strategies by prioritising market share over profits in the short to medium term.


On March 19, the World Health Organization announced that COVID-19 was a global pandemic—the first pandemic since the 2009 outbreak of H1N1 (swine flu). The number of infections and deaths continue to rise sharply across the world, and the outbreak presents a major shock to an already fragile global outlook.

Prior to the outbreak, global growth was expected to rise marginally to 2.5 percent in 2020 from a post-crisis low of 2.4 percent in 2019 (World Bank 2020a). Consensus estimates of growth now suggest deep recessions are likely in many advanced economies, while growth in emerging market and developing economies (EMDEs) is expected to slow sharply.

Weaker growth will also result in reduced demand for commodities. The direct impact of COVID-19 and measures taken to contain it have had substantial impacts on commodity markets and supply chains. Prices of most major commodities have fallen since January, led by oil which experienced its largest one-month fall on record in March. While mitigation measures to control the spread of COVID-19 are essential, they have caused severe economic dislocations and a sharp reduction in travel. For example, passenger journeys in China in March fell by threefifths compared to their normal level, while subway journeys in New York City have fallen by one-third. There has also been a reduction in the volume of shipping as a result of shrinking global trade. As a result, the International Energy Agency expects global oil demand to decline almost 10 percent in 2020, more than twice as large as the next largest plunge in 1980.

The prospects for commodity prices were already muted when the pandemic hit. Rising trade tensions and slowing growth in China were adversely affecting demand, and most commodities were in ample supply. U.S. oil production reached record levels in 2019, while most food commodity markets experienced near-record high production and stock levels.

While the current pandemic has few precedents in history, past episodes of major economic recessions or disruptions, as well as previous major disease outbreaks, can provide valuable insights into how commodity markets may be affected. For example, the terrorist attacks on the United States on September 11, 2001, led to widespread travel disruptions and reduced demand for oil. Past outbreaks of disease have had substantial localized impacts, particularly on agricultural markets. Past global recessions have been accompanied by sharp declines in industrial commodity demand.

What has been the impact thus far on commodity markets?

COVID-19 unleashed a unique combination of shocks to commodity markets, impacting both demand and supply simultaneously. Mitigation measures, while essential, disrupt both demand and supply of commodities. The unfolding economic recession presents a further major shock to demand. The combination of these demand and supply shocks manifest themselves through a variety of channels, with varying impacts on different commodities. Reduced energy demand for travel. The shutdown of travel has resulted in a substantial fall in demand for fuel for transport, which accounts for two-thirds of global oil demand. Many countries have implemented wide-ranging travel bans and stay-at-home orders, sharply reducing travel. Lower demand and prices for oil also reduces the price of crops used for biofuels, such as corn and soybean oil. Lower demand during economic downturn. The global recession is resulting in weaker commodity demand. Unlike demand for agricultural goods, demand for energy and metals is strongly affected by a slowdown in economic activity given its higher income elasticity.

Corn Futures

Disruption to supply chains. Some mitigation measures drive a wedge between consumer and producer prices of commodities, or between commodity exporters and importers. For example, disruptions to food supply chains may result in food security concerns, which in turn can trigger hoarding by consumers. That could push prices higher at the consumer level, while at the same time ample harvests, such as for grains, could lead to lower producer prices. Similarly, for metals, shutdowns of refineries could create a wedge between the prices of refined metals and ores.

Grains – Corn, Beans & Wheat.

Disruptions to agricultural commodity production. For agriculture, the upcoming growing season may be affected by shortages of available inputs resulting from mitigation measures. The labor force available for commodity production may be curtailed if vast numbers of people are subject to movement restrictions, including across borders. This is of great concern for agricultural production, especially in advanced economies, where there is a heavy reliance on migrant workers who may no longer be able to travel.

Disruptions to industrial commodity production. Mitigation measures may result in the closure of key commodity-producing operations. This could lead to lower production of affected commodities. For example, several copper mines have temporarily closed and new projects put on hold in major copper-producing countries. Adverse impact of policy responses. Trade restrictions could also impact food markets, for example, if food-exporting countries restrict exports, or if border closures affect the trade of commodities. During the 2007-08 food crisis, as many as one-third of countries adopted trade restrictions, increasing global food prices. An estimated 45 percent of the increase in world rice and almost 30 percent of the increase in world wheat prices during this period was due to such policies (Martin and Anderson 2011; World Bank 2019a). Currently, global food markets are markedly less vulnerable than in 2007-08, with production and stocks-to-use ratios of key food commodities near record highs, and prices unusually stable. Nevertheless, policy action by individual large countries could yet destabilize markets, as discussed below.

Oil markets

The impact of COVID-19 has been most severe for the crude oil market. Crude oil prices have fallen by two-thirds since January 20, the date of the first recorded human-to-human infection. The oil market has been hit by an unprecedented combination of negative-demand and positive supply shocks. Mitigation measures to stem the pandemic and a global recession have coincided with the collapse of the production agreement by OPEC and its partners in early March.

This stands in contrast with supply shocks facing many other industries, which likely face a reduction in supply due to mitigation measures.

Weaker demand. Transport disruptions and an economic decline have weakened demand.

Transport disruptions. The largest factor driving the collapse in oil prices has been the sharp reduction in demand arising from mitigation measures. The unprecedented drop in transport in many countries has led to a sharp fall in fuel demand. Oil demand fell by 6 percent (6 mb/d) in 2020 Q1, and the International Energy Agency anticipates it will fall by 23 percent (23 mb/d) in 2020 Q2, as a growing number of countries have put in place mitigation measures, particularly the United States (the largest consumer of oil).

Slowdown in economic activity. The slowdown in economic growth will also reduce global oil consumption. Oil has a relatively high-income elasticity of demand, which suggests that declines in economic growth can lead to falls in oil demand (World Bank 2018a, 2018b).

Fluctuations in supply. Oil prices have also been buffeted by the collapse and rebirth of production agreements among OPEC+ members.2 The breakdown of the OPEC+ production agreement in early March exacerbated the ongoing fall in oil prices, with a decline of 24 percent the day after the announcement. While the potential increase in supply arising from the end of production restraint (around 2-3 million barrels per day) was small compared with the expected fall in demand, it nonetheless aggravated expectations of chronic oversupply. In mid-April, the group agreed on historically large production cuts of 9.7mb/d. However, the announcement did little to support prices, given the uncertainty of demand and worries the announced supply cuts will be insufficient.

Evolution of commodity prices

The commodity price decline since early 2020 shares some similarities, but also differs in some respects, with earlier episodes.

The current pandemic has seen the largest one month decline in oil prices on record—one-and-ahalf times as large as the previous record. This reflects the combination of travel disruptions, a global recession, and the collapse of the OPEC+ agreement.

Copper prices initially declined only moderately, similar to the 9/11 attacks. However, as the severity of the virus has become more apparent and as estimates for economic growth have been revised down, copper prices have declined more sharply.

Agriculture prices fell substantially more during the 2009 global recession than in the current episode, but that decline in large part reflected an unwinding of an unprecedented spike in prices which saw prices of wheat, soybeans, rice, and corn reach all-time highs in 2008. Movements in gold prices have been broadly similar to previous events, with an initial rise followed by a decline, reflecting investor uncertainty.

Terrorist attacks of 2001. In the aftermath of the 9/11 attacks, oil prices fell sharply, while copper and agricultural prices were less affected and gold
prices increased. Disruption to travel disproportionately affected oil prices, while heightened uncertainty led higher prices for gold (as a safe haven asset). However, the moves in oil prices were considerably less pronounced than in the past two months.

Global recessions. During recessions, oil and copper prices typically fall, while agricultural prices are less affected. The sharpest declines occurred during the 2009 global recession, when oil and copper prices both fell by about 60 percent in three months, and agricultural prices fell 40
percent (unwinding their historic surge in 2008).

Gold prices initially rose as uncertainty spiked but unwound after one month as investors sold their holdings to meet margin calls. Except for oil prices, these movements were often considerably more pronounced than commodity price moves over the past three months of this year.

Previous disease outbreaks. In 2014, the emergence of Ebola in West Africa resulted in second-order effects in regional food markets. Guinea, Liberia, and Sierra Leone experienced severe disruptions in food markets, with supply shortages arising from quarantine-imposed travel restrictions on sellers, while panic buying further reduced available supply (Mann et al. 2015). This resulted in very large food price spikes and regional food insecurity (IFPRI 2020). As yet, the current outbreak has not resulted in localized price spikes, while global food price movements remain muted.

Evolution of commodity demand

Developments in commodity demand in early 2020 share some similarities, but also differ in some respects, with earlier episodes (Figure SF.4.A and SF.4.B). The fall in oil demand has occurred far more rapidly than in previous episodes as a result of mitigation measures. The International Energy Agency estimates that oil demand will fall 23 percent in 2020 Q2, and by 9.3 percent over the year as a whole, which would be more than twice as large as any previous decline (IEA 2020).

Demand for metals is expected to weaken in the first half of 2020 as the global recession deepen and demand from the manufacturing sector falls.

Agricultural demand is expected to be little changed, albeit with some temporary fluctuations due to hoarding.

The terrorist attacks of 2001. Commodity demand growth slowed briefly in the aftermath of the terrorist attacks in 2001. Oil demand growth averaged close to zero in the three quarters following the attacks, down from an average of 1.5 percent (y/y) in the previous four quarters. Metals
demand also declined slightly in 2001 but bounced back in the following year.

Global recessions. During global recessions, oil and metals demand typically fell, with a larger decline for metals than oil, reflecting its higher income elasticity of demand (Baffes, Kabundi, and Nagle 2020; World Bank 2019c). The largest single-year fall in oil demand was in 1980 when demand fell by just over 4 percent. The largest consecutive decline in oil consumption occurred in 1980-1982 when consumption fell by 9 percent relative to its peak in 1979.

A supply-driven spike in oil prices in 1980 resulted in a drop in consumption and also contributed to the 1982 global recession, which further depressed oil consumption. The largest fall in metal demand occurred during the 1975 global recession when consumption declined by 17 percent. In contrast, the two most recent recessions saw much smaller declines in oil and metals demand. For the 2009 global recession, this likely reflects shifts in the composition of commodity demand, specifically the growing importance of China, which was less affected by the global financial crisis (Baffes et. al 2018; World Bank 2018b). In contrast, growth in
agricultural demand slowed more mildly, and typically remained positive during recessions (since its demand is more closely linked to population
growth than income growth).

Shayne Heffernan Trade Idea

“The lower oil prices go in the short-term, the higher they will go in subsequent months/quarters. E&Ps that are naturally long oil are forced pay (i.e. not sell) to a counterparty to take barrels off their hands, which is unsustainable, even in the short-term. We expect to see sharp supply shut-ins from U.S. shale and Canadian producers over the coming weeks and subsequent declines afterwards. We estimate that the breakeven cash flow operating cost of a legacy well is in the high-single digit range (e.g. ~$8-10 bbl), which means that existing wells are losing substantial profits even at zero $/bbl. The destruction caused to non-OPEC supply will have a lasting impact for years to follow, in our view. This is the reason why the forward curve is trading higher today than it was when prompt-month was $22-23 bbl one month or even one week ago. The futures curve WTI price by 2030 is now >$55 bbl. By comparison, we have a $50 bbl Brent and $47.50 bbl WTI oil price forecast for Q4/21.”

“Oil markets are currently at an inflection point, in our view. It’s typically difficult to call a bottom for any asset class but, it should go without saying, when WTI reaches into negative territory, we are increasingly confident that a recovery will follow shortly. As supply cuts and demand recovers in subsequent months, so too should oil prices. We believe there’s approximately one, maybe two, additional months before cash market oil prices can recover to approximate prompt-month dynamics as May and June continue to present deepening storage issues. In turn, the weak cash market may actually pull June and July futures lower, while subsequent months may remain relatively well bid or even rally. Shayne Heffernan PhD in Economics

Why This Matters

The outbreak of COVID-19 has presented a major shock to commodity markets at a time when prospects were already muted. The combination of both major demand and supply shocks occurring simultaneously is unprecedented among previous events. The current pandemic particularly stands out for the speed and magnitude of the decline in both oil prices and oil demand resulting from the sudden stop in activity.

Other commodities have seen smaller declines in prices, as they have been less affected by mitigation measures, and are also experiencing supply disruptions. However, as the pandemic continues and the economic recession deepens, larger declines in demand and prices are possible,
particularly for metals.

The impact of COVID-19 on commodity market may persist for an extended period. In the shortterm, the deepening economic contraction may further reduce demand for industrial commodities, causing additional declines in prices. Continuing mitigation measures may increasingly impact supply chains, potentially threatening food security for the most vulnerable groups.

Commodity-dependent EMDEs, particularly oil exporters, are among the most vulnerable to COVID-19. In addition to the health and human toll and the global economic downturn, they face substantially lower export and fiscal revenue. However, lower oil prices provide policymakers in EMDEs with an opportunity to eliminate energy subsidies, freeing up fiscal space which could help meet the challenges of lower revenues (for oil exporters) and health-care costs resulting from the pandemic (for all EMDEs).

In the long term, behavioural changes may lead to shifts in sources of commodity demand, both geographically and by industry. A shift toward remote working may reduce travel and demand for oil, while a shift to near-shoring and retrenchment of global value chains could cause a permanent restructuring of supply chains and associated commodity demand. Lower oil consumption would also reap environmental benefits.

Technical Indicators

Overall, the bias in prices is: Downwards.

Note: this chart shows extraordinary price action to the downside.

By the way, prices are vulnerable to a correction towards 5.84.

The projected upper bound is: 3.50.

The projected lower bound is: 0.54.

The projected closing price is: 2.02.


A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 1 white candles and 8 black candles for a net of 7 black candles. During the past 50 bars, there have been 19 white candles and 30 black candles for a net of 11 black candles.

A falling window occurred (where the bottom of the previous shadow is above the top of the current shadow). This usually implies a continuation of a bearish trend. There have been 16 falling windows in the last 50 candles–this makes the current falling window even more bearish. The two candles preceding the falling window were black, which makes this pattern even more bearish.

Three black candles occurred in the last three days. Although these candles were not big enough to create three black crows, the steady downward pattern is bearish.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 13.1051. This is an oversold reading. However, a signal is not generated until the Oscillator crosses above 20 The last signal was a buy 17 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 22.72. This is where it usually bottoms. The RSI usually forms tops and bottoms before the underlying security. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 16 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -119.This is an oversold reading. However, a signal isn’t generated until the indicator crosses above -100. The last signal was a sell 13 period(s) ago.


The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 4 period(s) ago.

Rex Takasugi – TD Profile

UNTD ST OIL FUND closed down -0.380 at 2.190. Volume was 99% below average (consolidating) and Bollinger Bands were 44% wider than normal.

Open      High        Low        Close        Volume
2.300     2.300       2.130      2.190        1,107,945
Technical Outlook
Short Term:           Oversold
Intermediate Term:    Bearish
Long Term:            Bearish
Moving Averages: 10-period       50-period        200-period
Close:           3.41            6.46             10.44
Volatility:      171             167              93
Volume:          372,165,760     155,963,088      57,864,356

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.


UNTD ST OIL FUND gapped down today (bearish) on light volume. Possibility of a Common Gap which usually coincides with a lack of interest in the security. Common Gaps are fairly irrelevent for forecasting purposes. Four types of price gaps exist – Common, Breakaway, Runaway, and Exhaustion. Gaps acts as support/resistance.

UNTD ST OIL FUND is currently 79.0% below its 200-period moving average and is in an downward trend. Volatility is extremely high when compared to the average volatility over the last 10 periods. There is a good possibility that volatility will decrease and prices will stabilize in the near term. Our volume indicators reflect moderate flows of volume out of USO (mildly bearish). Our trend forecasting oscillators are currently bearish on USO and have had this outlook for the last 71 periods. Our momentum oscillator is currently indicating that USO is currently in an oversold condition.

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S. Jack Heffernan Ph.D. Economist at Knightsbridge holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Crypto, Mining, Shipping, Technology and Financial Services.