Oil prices have tanked since fear about the coronavirus began to drive stock-market sentiment last month. Brent crude, the global benchmark, has fallen $11 per barrel on the spot market since Jan. 17, when fear about the virus began to grow in financial markets.
Worry that the disease could slam demand has put the oil market into contango. Spot prices are now below futures prices, reflecting market sentiment that supply is plentiful now but could be less so in the future.
Oil took a breather from its slide on Tuesday—front-month Brent crude futures were up 1.4% to $54.97—but concern remains about how the outbreak will affect consumption.
The coronavirus has forced the cancellation of thousands of flights. It may be sapping Chinese demand by up to 3 million barrels a day, or about 3% of the global total.
One analyst, however, argues that the drop has been so sharp that traders may have overshot the mark. Goldman Sachs analyst Damien Courvalin estimates that at these levels, the market is pricing in a longer-term drop in demand of 750,000 barrels a day, and that global gross domestic product will be 0.4% lower than it would have been without the health crisis.
Considering that the S&P 500 is still higher for the year, sentiment in the oil market appears particularly pessimistic—and perhaps disconnected from other economic indicators.
BP (BP) CFO Brian Gilvary said on a conference call on Tuesday that he thinks the virus could reduce demand by 300,000 to 500,000 barrels a day this year, but that oil production cuts by OPEC could put the market back into balance.
“In conclusion, we find that the latest sell-off has left the oil market pricing in a likely excessive demand hit, with only modest further downside potential,” Courvalin wrote. “In particular, oil prices are now at levels where we would expect a supply response from both OPEC and shale producers, and where China would likely seek to build crude inventories.”
Goldman recommends a futures trade—“entering a long December-20 versus December-21 timespread Brent trade, with an initial value of negative 5 cents per barrel.” Timespread trades typically involve buying one futures contract and shorting another.
Write to Avi Salzman at avi.salzman@barrons.com
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February 04, 2020 at 11:10PM
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Oil Is Rebounding Because the Plunge Might Have Gone Too Far - Barron's
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