The corona outbreak has significantly added to the uncertainty around the already volatile oil market as experts discuss new strategies and business models. As the death tolls from the coronavirus increase, the oil market will continue to suffer losses. Governments have escalated lockdowns to contain the corona outbreak, leading to a major slash in demand outlook for oil. The threat of a global economic contraction looms large. However, the question remains: To what extent and for how long? Certainly, it is a new normal for the industry and an entirely new territory.
We haven’t seen anything like this. – Jace Jarboe, a Futures and Options Broker with Daniels Trading, Chicago
It’s mind-blowing. – Bjarne Schieldrop, Chief Commodities Analyst, SEB, Oslo
2020 has hit us like a fist. – Gavin Thomson, Vice Chairman for Energy in the Asia Pacific, Wood Mackenzie, Singapore.
The consequences of Covid-19 [the coronavirus] for global oil demand will be significant. – IEA
In these turbulent times, we speak to Mr. Gaurav Sharma, an Oil and Gas Market Analyst with over two decades of experience. He regularly contributes to the leading oil and gas publications and broadcasting outlets including BBC Radio, CNBC Europe, Asian and Middle Eastern Network via his own website, Forbes, Rigzone, etc. Here’s what he has to say.
The impact of Corona Outbreak on Oil Market
In recent memory, the worst oil market downturns have either been on account of oversupply or a demand slump. The current trading year is witnessing simultaneous supply and demand crises. The coronavirus has hammered economic activity to varying degrees in five of the biggest crude oil importers, i.e. U.S., China, India, Japan, and South Korea.
As it became apparent in February that China’s average 14 million bpd in crude imports would take a Q1 2020 knock, OPEC+ exacerbated market turmoil as Riyadh and Moscow failed to come to a production cut agreement. In response, the Saudis have now offered as much as $8/bbl discounts for April shipments and have vowed to up production to 12.3 million bpd. This has shot market confidence to pieces in tandem with the global spread of the coronavirus.
Most demand forecasters are predicting shrinkage of 90 kbpd to 155 kbpd from earlier forecasts of ~1.2 million bpd. Even this might be too optimistic! I am pretty bearish on the oil price, and fully expect sub-$20 per barrel (late “teens to early twenties”) levels for WTI front-month and Brent, with airlines, shops, restaurants, banks, whole economies in lockdown, however temporary that might prove to be.
Come the end of the year, I expect oil prices to average no higher than $35/bbl for 2020. That too is predicated on major global economies getting a handle on the coronavirus and an uptick in economic activity in end-Q3 and Q4. The aforementioned big five crude markets have to find stability for it to happen, especially India – the only one in the group that appeared on track to raise its imports compared to 2019, before a global pandemic broke loose.
Finally, here’s a footnote – I keep getting asked, could OPEC+ have done things differently and would it have mattered? Yes, but now it’s too late and events have overtaken OPEC. Moscow and Riyadh will eventually get back to the negotiating table, but the next few quarters will be heavily bearish for the market. Get ready for substantial near-term oil trading in the “$20s.”
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(This piece was contributed by Gaurav Sharma and Energy Dais reserves all rights of publication.)