Friday, February 28, 2020

A right royal crude market hammering


Coronavirus jitters have delivered a right royal hammering to the crude oil market, with the pace of bearish blows picking up considerably over the last 48 hours. Both major benchmarks are now over 25% below their 2020 peak achieved in the wake of the US-Iran skirmish at the turn of the new trading year. 

Key issue in finding a price floor stems from the fact that many, in fact most, crude demand forecasters are shooting blind, as the Oilholic wrote on Forbes.com. The local viral outbreak in China soon became a regional epidemic, and is now – in the view of some – a global pandemic in a matter of weeks. Complete dataset of the virus' economic impact will be trickling in soon, and there is market conjecture around that the global economy could be heading for a recession. 

Were that to be the case, and the fact that the virus has reached 50 countries, could result in crude demand destruction on an unprecedented scale, as yours truly via on Rigzone. So where from here? No one really knows, and unless OPEC+ provides temporary reprieve via a production at its next meeting scheduled for March 5-6, price floor would be hard to pin down. We could see benchmarks tumbling to as low as $30 per barrel; something that has indeed happened in the not too distant past. 

For now retail, travel, airline and energy stocks continue to take a hammering. In fact, the energy sector is now down 34% from 52-week closing high, while both Brent and WTI futures look likely to post their worst weeks in recent memory (last seen between December 2008 and January 2009 at the height of the global financial crisis). 

That was also the verdict of many yours truly interacted at the recently concluded International Petroleum Week in London. The event itself looked like it fell victim to the coronavirus as understandably Chinese and indeed many overseas delegates stayed away. 

Only major energy CEOs in attendance were those of BP and Vitol, and most attendees were pretty pessimistic about the oil price direction. Nonetheless, dialogues on energy transition over the course of three days proved to be very interesting as the sector continues its attempt at a low-carbon future. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2020. Graphs 1 & 2: Brent & WTI futures price movement 3M to Feb 27, 2020.

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