The coronavirus outbreak is proving a “true black swan” for oil markets, Warren Pies of Ned Davis Research told CNBC. Chinese demand for oil is down by two to three million barrels per day (mbpd) – roughly a quarter below normal levels. That is leaving the energy industry facing the prospect of no overall demand growth for the calendar year.
Trading above $54 per barrel at the start of this week, Brent crude is down almost 18% since 1 January. America’s benchmark oil future, West Texas Intermediate, fell below the $50 per barrel mark on Monday, a 13-month low.
Opec has been sidelined
Plunging oil prices came as oil cartel Opec and ally Russia struggled to agree on a new round of supply cuts. Opec is already curbing output by 2.1 million bpd compared with a 2018 baseline and is urging Russia to join in with a plan for a further cut of 600,000 bpd. Yet Russia this week appeared reluctant to sign up to Opec’s strategy, arguing that it is too soon to assess the effect on demand of the coronavirus.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The big Persian Gulf exporters are desperate for prices to rise, says Julian Lee on Bloomberg. Falling Chinese demand could cost them “more than half a billion dollars a month” at current prices. Opec and Russia may soon be forced to act. Having floated the idea of further cuts, anything less may well lower prices again.
The Middle Eastern producers are in any case less central to oil markets than they once were, notes Samuel Burman of Capital Economics. The region accounts for about one-third of global production, down from 50% during the 1990 Gulf War. Flexible American frackers are able to step in quickly with new shale oil when prices rise.
The result is that despite heightened geopolitical tensions in the Middle East, the oil “risk premium” has fallen in recent years. The risk premium is the extra price paid for oil over what would be justified by supply and demand fundamentals alone. When oil prices spiked to $147 per barrel in 2008, tension between Iran and Israel swelled the risk premium to more than $100 per barrel. Yet between 2015 and 2019 the risk premium has averaged just $7. At the end of last year the premium even went negative: traders were more worried about weak demand than about future supply shocks.
The oil rout is unlikely to go on for much longer, says Tom Holland of Gavekal Research. With China gradually returning to work (see page 4), fuel demand could “return towards pre-epidemic projections as soon as the second quarter”.
With West Texas Intermediate slumping to multi-month lows the pressure on cash-strapped US shale producers will grow. That should act as a brake on supply. Expect Brent to stage a modest recovery to average around $60 per barrel this year.
-
Water companies blocked from using customer money to pay “undeserved” bonusesThe regulator has blocked three water companies from using billpayer money to pay £1.5 million in exec bonuses
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
-
Halifax: House price slump continues as prices slide for the sixth consecutive monthUK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investmentsInvestors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodationStudent accommodation can be a lucrative investment if you know where to look.
-
Best investing appsLooking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
-
The world’s best bargain stocksSearching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in BritainNew research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolioAs the UK recession is confirmed, we look at ways to protect your wealth.
