Oil markets faced an unprecedented volatile environment in 2020, impacted massively by COVID-19 and its ensuing demand collapse, necessitating considerable reactions by policy makers. At one point in April, a confluence of factors even pushed WTI futures into negative territory for the first time in the history of the oil market. In response, OPEC and non-OPEC countries under the Declaration of Cooperation (DoC) met in the same month to reach another landmark decision to stabilise and rebalance oil markets. This impressive effort was also commended by the G20 at their extraordinary Energy Minsters’ Meeting in April. At the same time, central banks across the world stepped up their efforts to provide sufficient liquidity and to stem the negative impact of lockdowns. These monetary interventions provided the financial basis for a swift recovery in the global economy, which also had a positive effect on oil markets.
Among the central banks of the major developed economies, the US Federal Reserve provided a large stimulus, cutting interest rates by 150 basis points to around zero in March. Meanwhile, the European Central Bank (ECB) and the Bank of Japan (BoJ), left their policy rates unchanged, as these were already effectively at zero, or even slightly negative. However, all of them engaged in considerable expansion of their balance sheet to assist access to credit (Graph 1). These looser monetary policies helped to restore calm in government and corporate credit markets, including the energy credit market, which had been very distressed in March.
While fiscal deficits, and hence public debt, increased substantially across major developed economies – for example in the US alone, public debt rose by $2.8 trillion during 2Q20 – the low interest rate resulted in lower cost of service for the newly issued debt and hence alleviated concerns of being able to sustain this debt. The combination of stabilising oil prices and lower cost of debt has also helped energy producers.
Another area particularly impacted by central banks’ interventions was currency markets. The intervention by the Federal Reserve resulted in the US dollar depreciating against its major counterparts, following an initial spike in March. This has been especially helpful for emerging markets, which have the majority of their foreign currency debt denominated in the US dollar, and whose financial markets are more vulnerable to capital outflows in times of crisis. In the past, a gradually weakening US dollar has also been supportive to oil prices and oil producing exporters.
In the meantime, monetary policy makers stated that both monetary and fiscal support are necessary to achieve a sustained recovery. Furthermore, considering the increase in forced savings by consumers during lockdowns, the positive impact of public investment to compensate for the shortfall in household demand could be stronger than expected.
With this, the combination of monetary, fiscal and oil market-related policies may support central banks’ efforts to achieve their inflation targets, which have been rarely met since the global financial crisis (Graph 2). However, it should be noted that the expectation of further fiscal stimulus in the US, in combination with a recovery in the global economy, may lead to the re-emergence of a spike in key market interest rates as experienced in 2013. Therefore, markets may expect monetary policy to begin tightening earlier than anticipated, which would have a potentially negative effect on the global economy and oil markets. In their continued efforts to support the global economic recovery, the countries participating in the DoC undertook tremendous measures to stabilize the global oil market, most recently at the beginning of January 2021. Together with the various national fiscal and monetary stimulus measures, the decisions reached by the DoC to rebalance the oil market will provide further upside potential for economic recovery in 2021 and make monetary policy efforts by central banks more effective.