Since January, the spread of the coronavirus has sent global stock markets crashing and reversing nearly all of the positive momentum in oil prices over the past four months, doubling down on a pessimistic oil demand outlook despite multiple short-term risks to supply. As the virus spreads out of Asia, the oil market will continue to suffer losses, but the question remains: how deep and for how long?
The coronavirus is affecting the oil market in two ways. First, travel restrictions due to containment efforts are limiting the use of jet fuel, and supply chains are slowing and industrial activity is down as companies send workers home – meaning less oil and oil products are being used and produced. This has a direct impact on oil consumption and provides information on the nearest estimates of real oil demand. Secondly, the reaction of the stock market to the impact of the coronavirus on the global economy creates a forecast for global oil demand in the long term prerogative. As market sentiment worsens with regard to the state of the global economy, so do forecasts for the future oil demand curve, prompting a flight from oil and energy reserves and further price declines.
- Saudi Arabia and Russia feud over coronavirus oil response: will everyone lose?
- What's going on in the oil market right now?
- Geopolitical implications of the coronavirus
- Domino effect: fall of the ruble
- What will happen to the dollar and the euro
- The global crisis leads to a reduction in the cost of everything
Saudi Arabia and Russia feud over coronavirus oil response: will everyone lose?
“While Russia's decision last week not to support an OPEC proposal to cut production and the ensuing oil price war, which has pushed more than 9 percent at press time, is certainly part of a wider story of the economic fallout from the coronavirus. The outbreak, it's actually better understood as a geopolitical story about how the rise in US energy production strengthened the international position of the United States, which in turn changed a number of global relationships,” says Randolph Bell.
What's going on in the oil market right now?
Over a remarkable month-long period, early expectations of the impact of the coronavirus on oil demand have moved from initial estimates that the virus will primarily reduce demand for Chinese oil and wider jet fuel consumption to estimates that indicate a much larger impact on global economic structure in the world.
Barclays' original note at the end of January that oil consumption would decline by around 600,000 to 800,000 barrels per day (bpd) during the first quarter and by 200,000 bpd throughout the year was revised down by the IEA in downward annual growth in oil demand by 365,000 bpd. The emerging possibility of a recession now dominates the conversation about year-end oil demand.
The reaction to oil prices was significant. Brent hit a twelve-month low last week, with the near-term outlook looking bleak and the outlook increasingly bleak for the balance of the year. Over this period, the forward curve, a marker of the expected cost per barrel for the rest of the year, fell last week, suggesting that oil traders see no value in holding or selling their shares. At the end of the week, Brent traded at just over $50 a barrel, while crude oil prices hovered around $45.26.
It is important to note that after almost a year of market anxiety due to a glut of global oil supplies, the current market sentiment regarding the projected decline in demand is so significant that events that would otherwise be huge market drivers have largely gone unnoticed.
The near-total removal of Libyan oil from the market (reportedly in excess of 800,500 bpd) and the escalation of sanctions against Venezuelan production continue to pose large short-term supply risks, however, due to the magnitude of an increasingly realistic coronavirus worst-case scenario on the global economy , both passed without much attention.
On Feb. 2, oil prices rebounded slightly, with both Brent and WTI up about two dollars amid a broader bounce in the stock market. However, this jump should be driven by volatility due to the uncertain economic outlook, expectations of lower interest rates in the United States and Canada, and expectations of a possible cut in OPEC+ output when it meets within a few days.
As the oil market continues to react to the dire economic outlook, there are a few key points to note.
Geopolitical implications of the coronavirus
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Domino effect: fall of the ruble
In particular, the anticipation of a possible OPEC+ cut makes it the most important event to possibly restore some confidence in the oil market in the short term. These cuts could reportedly be as high as 1.7 million BOD, but Russia's apparent hesitation to participate in these cuts remains an open question, which is important for two reasons.
First, if Russia decides to participate, there will likely be a strong announcement about when these cuts will be reviewed, risking any production cuts being interpreted as a shorter-term solution to what the market is increasingly pricing in as longer-term.
Economic downturn. Second, in the worst case scenario, when Russia decides to either not participate or limit its participation in production cuts, not only will the effectiveness of cuts in Saudi Arabia or the UAE be limited, but supply-side measures could be weakened compared to a possible drop in market confidence. to group consensus and the ability to manage excess supply.
Meanwhile, the pace of the spread of the virus in the United States and Europe could have a further impact on broader market confidence, as the risk rises that key financial centers will have a material impact on containment efforts. This will only add to record losses in the stock market and encourage a flight away from oil as confidence in the economic outlook continues to decline and/or panic sets in.
Despite attempts last week by U.S. President Donald J. Trump to reassure the public that the United States will not be affected, the ability of the United States to completely isolate itself from the spread of the virus is limited.
In the longer term, the spread of reported coronavirus cases outside of China to South Korea, Iran and, most recently, Italy and California highlights containment concerns and further projections of a delay when the outbreak could peak. Further spread of the virus seems inevitable at this stage, which will severely reduce oil consumption in the near term and increasingly affect expectations for economic growth and oil market recovery in the long term.
Because the time frame for containing the virus is so unclear, the shape of the recovery curve is increasingly difficult to judge. There are clear differences between the coronavirus and the 2003 SARS virus (where China's gross domestic product (GDP) and oil production rebounded the following quarter), but hopes for a similar V-shaped recovery seem elusive as the virus legalizes.
Mixed signals about whether the spread of the virus in China is indeed being contained also makes it difficult to judge whether the virus's origins are over.
Signs of a recovery in China could lead to lower oil prices and improve the long-term economic outlook. Interest rate cuts, coupled with reports that coal-fired power capacity is back 95% operational, rising crude oil inventories and continued buildups of steel stocks, indicate that Beijing is poised to bounce back quickly — a politically necessary move after a third year. Declines in economic growth coupled with internal dissatisfaction with how the outbreak was initially handled.
However, unlike in 2003, China is far more connected to international markets, and its unilateral economic recovery efforts could only go so far. And when you consider how hard China's Asian neighbors like South Korea (a major hub for intermediate goods) have been hit, and the likelihood that the virus will eventually reach another major oil demand hub like India, could put pressure on the global economy. . And China's own economic recovery.
Meanwhile, the speed of the spread of the coronavirus raises the possibility that this downturn could be longer than currently expected. A recent report from the United Kingdom Department of Health, highlighted by Reuters journalist John Kemp, indicates that it could take four to six months to develop a vaccine against the virus and introduce it to a critical mass of patients. On Feb. 28, Bank of America forecast that global GDP could be as low as 2.8 percent this year, the slowest growth since the global financial downturn in 2009. These timings, the economic downturn and the consequent malaise in the oil market, will have longer tails.
What will happen to the dollar and the euro
A more U-shaped recovery creates a number of additional uncertainties. Bank of America also notes that shale companies have a $45 per barrel WTI floor before the economy shuts down. Add that to Schlumberger's predictions that production is already poised for a decline of at least 500,000 bpd this year, and a prolonged economic downturn, or recession and lower oil prices, could put insurmountable pressure on short-cycle producers who are already overweight with debts.
How such a prolonged downturn could affect the United States election will have long-term implications for domestic oil and gas policy, especially as the health of the United States stock market continues to be Trump's achievement. On the other hand, the spread of the virus outside of Iran into Iraq, Saudi Arabia, the UAE and the rest of the Middle East could flip the calculation of market risk from demand to supply if the virus starts to affect oil production.
The week of February 21 will be one that the oil market will not soon forget, showed how exactly prices are sensitive to market demand. However, while the possibility of a major supply correction remains in the cards, a long-term correction of last week's oil price collapse will require restoring market confidence in economic growth and the future oil demand picture. Otherwise, the possibility that "black swans" like the Coronavirus could spawn more economic "black swans" becomes more and more real.
The global crisis leads to a reduction in the cost of everything
WASHINGTON. President Trump's trade war is chilling business investment, trust and trade flows around the world, which foreign leaders and business leaders say is exacerbating a global economic downturn that has already begun.
The recent easing in Europe, Australia and other parts of the world coincides with the intensification of Mr. Trump's trade struggle with China and other partners. Economists are warning that further escalation by Mr Trump - like tariffs on more Chinese goods or levies on foreign cars - could slow global growth.
“Given these trade tensions, the global economy is, in a sense, approaching a crossroads,” said Ayhan Kose, director of the World Bank Outlook Group.
Weakness in China, fueled in part by the aftermath of the trade war, has spilled over to Germany, Australia and other countries, pushing up supply chain costs, cooling exports and worrying political and economic leaders.