Resources

Energy Analyst Pavel Molchanov thinks that 2020 may see a steeper drop in demand than 2008 and 2009 combined.

The oil market is currently facing an unprecedented one-two punch: worldwide demand disruptions due to COVID-19 compounded by a price war between Saudi Arabia and Russia. Assuming the demand impact peaks in the second quarter, for the year, we are modeling global demand down 1.5 million barrels per day, steeper than the declines from 2008 and 2009 combined.

After reports that worldwide coronavirus cases crossed the 200,000 threshold, equities declined sharply on Wednesday with the Dow closing at a new 2020 low while the S&P dropped 5.2% to finish just barely above Monday’s close. Commodities were hammered to an even greater degree. In fact, WTI found its intraday bottom within a dime of $20 and would finish down a whopping 17.1% to $22.35 per barrel (Brent closed down 8.4% to $26.32 per barrel). Unsurprisingly, given the day for crude, the E&P index declined 9.6% and the Oil Service index fell 11.9%.

Ahead of market hours on Thursday, crude futures were up and equity futures were down.

Needless to say, the timing of improvement in demand, enabled by the easing of travel bans and other restrictions, will largely be a function of medical and public health developments related to the virus. As it relates to the price war, an important (but somewhat below-the-radar) date we are watching is April 22, Russia’s constitutional referendum. Assuming that Putin wins the referendum, we anticipate that the Kremlin’s current nationalistic fervor will subside, opening the door to a deal with Saudi Arabia in the May/June time frame, followed by normalization of Saudi output.

Also worth noting: the Saudi economy needs $70 per barrel Brent to balance its fiscal requirements, and moreover, there is the political sensitivity of watching Aramco shares trading below the IPO price.

Several key question marks remain:

1. On the bullish side, the possibility of supply disruptions above and beyond the current ones, including but not limited to Iran, and
2. On the bearish side, the massive uncertainties surrounding the virus’ demand impact.

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. The Dow Jones Industrial Average (DJIA), commonly known as “the Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The index comprises stocks in the S&P Total Market Index that are classified in the GICS oil & gas exploration & production sub-industry. The Oil Service Sector Index is a price-weighted index composed of the common stocks of 15 companies that provide oil drilling and production services, oil field equipment, support services, and geophysical/reservoir services. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.