March 9, 2020

A worst-case scenario appears to be unfolding for oil markets. expectations of a demand shock due to the global outbreak of the Covid-19 coronavirus collided over the weekend with an anticipated supply surge after Russia, Saudi Arabia and the other members of opec+ alliance of oil-producing nations had a major fallout over production cuts.

As a result, oil futures plunged sharply in asian trading today, with brent crude trading in the low $30’s range – down by 50 per cent since the start of the year. The prospect of a full-blown oil price war alongside a deepening global outbreak of the Covid-19 coronavirus epidemic caused global markets to gyrate.

James Trafford, analyst & portfolio manager at fidelity international, comments: “How low can oil go? A number of factors will weigh heavily on medium term prices, including whether a political solution can be attained to resolve the apparent opec+ standoff, and how quickly the virus-hit areas return to normal levels of demand. But in the near term, it looks entirely possible we could drop to cash costs of production (of brent at around $30 per barrel) or even test the lows of around $27 per barrel seen in 2016.

“So far, oil-related equities are tracking the oil price lower. We would eventually expect to see a bottoming-out in stocks before the commodity itself: this is because equities are an anticipatory asset class which must look-forward to a future recovery, whereas the commodity market has to clear the current supply and demand dynamics. But that bottoming will require some stabilisation in the coronavirus datapoints, or signs of a policy rapprochement among oil producers. In the meantime, investors should brace for volatility.”