Oil Markets in freefall or will it recover? We investigate!

Whoever controls oil controls much more than oil

-John Mccain

We couldn’t agree more, but for now it is Coronavirus outbreak that is controlling the Oil market. We believe in the following concept- Oil wields the power sought by many but held by none.

Source: Refinitiv Eikon

The Western Texas Intermediate, the US crude oil benchmark future traded at US$ 21.51 a barrel on 28 March 2020 at 5:53 PM AEDT, declining by more than 55% since the start of the year and touched the 18 years low mark. Yes, the times have been tough for the oil market. The coronavirus outbreak, which resulted in travel ban and quarantine, led to the slowing demand and the Russia-Saudi Arabia price war following March 8^th failure of OPEC to reach on a consensus to cut on the oil supply.

Crude Oil Prices bounce back from an 18-year low: What to expect in the coming times?: Must Read

Source: Refinitiv Eikon

Similar fall was registered in the Brent crude oil future prices, the European benchmark which traded at US$24.93 a barrel on 28 March 2020 at 5:53 PM AEDT. A major comment came from the IEA which speculates the headwinds are just too strong for the Crude oil markets for now. What do we do? We get into the matter and we inspect. Is it really that bad?

Oil demand in Freefall – Mr Fatih Birol

The International Energy Agency’s (IEA) Executive Director, Mr Fatih Birol said on 26 March 2020 that the prolonged oil spat between Saudi Arabia-Russia has not aggravated any further which may lead to additional fall in the ongoing huge depression in the demand.

The IEA’s director’s comment came at a time when the Who’s who of the Crude oil industry including Industry experts, traders, banks and analysts all speculate a supply glut in the market as almost half of the world’s population is living under quarantine and the demand for the hydrocarbon commodity has hit the floor.

Source: IEA, Kalkine Research

The IEA director, who earlier served as the chief economist for the organisation anticipates that the decline in demand would continue to exacerbate during the second quarter. Prior to this, the Vitol Group, the trading giant’s head Mr Rusell Hardy had anticipated that the crude oil demand has actually fallen by 15-20 million barrels per day and would average out at around 5 million barrels a day for the year.

What actually will happen? No one knows, but we do know that for sure, this is not what the global agencies such as IEA had speculated and a prevailing behemoth downward pressure on the crude oil prices persists which easily outweigh any positive that may supports the growth in the prices.

The US Energy Information Administration’s (EIA) take on the demand dip

As per the EIA, the combined headwind of the slower economic growth along with the reduced travel would result into a lower demand growth of 0.4 million barrels per day for 2020. It is to be noted that this is a revised figure to the January’s forecast of 1.3 million barrels per day global oil demand growth, which did not include the Covid-19 reductions. So, EIA believes a dip of only 0.9 million barrels of oil per day due to the Chinese Virus.

Demand for Crude Oil & Distillate Products Down: Is China to blame?: Read Here

Our take on the matter

In last few weeks, COVID 19 has become a source of global health crises moving on from Chinese health issues. The situation is turning to be worse by each passing day with growth estimates for 2020 being downgraded. Though the situation remains under question, the global oil demand is anticipated to fall in 2020 (a full year fall in decades) because of China’s deep contradictions in demand - which accounted for nearly 80% of the global oil growth in 2019 and interruptions in travel and trade.

We believe that almost 16 cities in China have been under quarantine since the end of January. India which uses almost 4.4 Mn barrels a day is another country, trying to fight mega battle against coronavirus through the government call out for 21 days (3 week) ban which is anticipated to be extended further.

United Kingdom also called out for a quarantine as a safeguard measure after many European countries such as Italy failed to control the outbreak. Further just on 27 March 2020, the UK government confirmed that the UK Prime Minister Boris Johnson has tested positive for COVID 19, additionally the Health Minister, Matt Hancock and Prince Charles, the next in line for the kingship, are also tested positive. United Kingdom consumes an average of ~1.6 million barrels of oil each day. UK has 14,571 confirmed cases with 761 deaths 28 March, 6:02 PM AEDT.

IEA believes that the global GDP growth could be limited to 2.4% against earlier forecast of 3%, India at only 5.2% and UK at 1% against 1.2% estimate earlier. The outbreak is now the single largest reason restricting the growth and adversely affecting the global economies.

Coming to the world’s biggest superpower, New York, the world’s financial capital, could emerge as the new epicentre of the outbreak which first shifted from Wuhan, China to Italy and then now to New York state, taking lives of 27,761 people as of 28 March, 6:02 PM AEDT. The United States currently has 104,839 confirmed cases of the Coronavirus with New York City alone, registering ~26,697 confirmed cases as of 28 March, 6:02 PM AEDT. What we believe?

God Bless America! If not stopped at this moment, the US will have to go for a full-scale quarantine such as the likes of India, which seems to be working in favour of these countries for now.

Canada, which shares boundary with the new epicentre of the pandemic, the Ney York state, has confirmed cases of over 4,760 with 56 deaths as of 28 March, 6:02 PM AEDT. Earlier, Justin Trudeau, the prime minister’s wife Sophie Grégoire had tested positive for the virus.

Also, Australia announced a mandatory quarantine for all the arrivals to the country. Australia has so far registered 3,583 cases with 403 deaths. New Zealand has almost 453 confirmed cases including 50 recovered patients as of 28 March, 6:02 PM AEDT.

More Quarantine Expected: Other Regions to go for

Other parts of the world might actually take the quarantine path, the United States might have to call out for full scale quarantine especially along the east coast. The decline in the Crude oil demand would continue as per our subject matter experts, who also think that the coming 3-4 weeks would be crucial for the global economy and for the crude oil market to help set the future.

Crude Oil Weekly Review: Continues to gain on the second day in a row: Read Here

Our Conclusion on the entire scenario

In the upcoming 1-2 months, we could see further dip in the oil demand which would start to recover thereafter and might expect the strength to reflect in the crude oil prices to bounce back to over US$45 a barrel by the end of 2020.

The effects of Coronavirus would take some time to diminish probably by third quarter of this year, as per EIA. And when this happens, we would tell you.

So, stay tuned We’ll be back with more amazing content but for now, do shoutout through the social media handles above and let us know what you liked!