April 7, 2020

Oil’s Wild Ride Amidst the COVID-19 Outbreak

Oil’s Wild Ride Amidst the COVID-19 Outbreak

What a time to be an oil trader!

Since the coronavirus outbreak, oil prices have taken a major blow. Crude futures tumbled to a 17-year low in March as the global outlook for fuel demand darkened with travel and social lockdowns. 

And although oil prices staged their biggest jump in history just last week on hopes of an end to a price war between Saudi Arabia and Russia, a recent CNBC survey showed that oil prices could plunge below $20 a barrel this quarter.

The reasons? A synthesis of cratering global demand and fresh disagreements between the major oil producers concerning output cuts needed to stabilise energy prices.

The numbers already speak louder than words. On January 1st, a barrel of crude oil sold for $67.05 on New York’s NASDAQ exchange. At the time of writing, oil is trading at around $30.00 per barrel. 

Looking ahead, bearish forecasters see two main forces that could keep oil prices depressed in the second quarter: widespread doubt that Saudi Arabia and Russia would relent in their price war and commit to the deepest cuts ever, and a continued glut caused by an enduring collapse in global demand as the full economic severity of the coronavirus pandemic unfolds.

Moreover, travel restrictions, border closures, lockdowns and economic disruption caused by ‘social distancing’ and other measures currently taken by governments to slow the spread of the virus are likely to continue to linger even after the virus clears, clouding any optimistic prospects of a significant recovery in oil prices for the upcoming months.

Despite the bearish consensus, nine survey respondents held a more constructive view. Within that group, six forecasters expected Brent crude prices to stabilise around the mid-to-late twenties in the second quarter, one called for $30 a barrel while two others topped the range at $42-$44 a barrel.

To account for the extreme uncertainty facing energy markets, the International Energy Agency has developed two scenarios for how global oil demand could evolve this year.

In a more pessimistic low case, global measures fail to contain the virus, and global demand falls by 730,000 barrels a day in 2020.

In a more optimistic high case, the virus is contained quickly around the world, and global demand grows by 480,000 barrels a day.

In Conclusion

The short-term outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity and the demand for oil.

Equally important, keep an eye out for upcoming OPEC+ production cut talks, which could ignite either a further plunge or sudden spike in oil prices. The next meeting between Saudi Arabia and Russia is scheduled to be held this Thursday, according to sources. 

Regardless of what comes next, there’s no doubt that the historic demand shock sparked by the coronavirus pandemic has led to the wildest ride the global oil markets have ever seen.

And if the past month has been any indication, you better buckle up tight because from the look of things, the ride is far from over.

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