The world and its financial markets were already precariously placed on a cliff-edge as 2020 got underway, but the global impact of the Coronavirus has caused even greater volatility during Q1 and the beginning of Q2.
The effect of the Covid-19 outbreak has been pronounced, with the Madrid and Milan stock indexes losing 14% and 17% respectively over the course of just 24 hours last week. Currency and commodity prices have also sunk as the virus has escalated globally, with crude oil one of the hardest hit assets despite relatively tighter global balances.
We’ll appraise the performance of oil further below, while asking how low prices could ultimately sink in the current climate?
Oil Price And Demand – A Guide For 2020
In truth, the oil and liquid fuel market has been strained for some time now, thanks to an ongoing imbalance between supply and demand.
Of course, this imbalance has been managed in recent times by OPEC, who implemented a global production cap for both member and non-member states alike. While this has remained in place for a significant period of time, the agreement has been tenuous at best, with a select few participants continuing to ignore the aforementioned production cap and thresholds.
This number includes both Nigeria and Iran, while Russia’s poor compliance with the OPEC caps has also caused consternation amongst market leaders Saudi Arabia. This situation has finally come to a head, with the OPEC deal set to collapse by the end of the month and Saudi Arabia already poised to hike their oil output above the 10 million bpd mark in April.
This has already encouraged the U.S. Energy Information Administration (EIA) to forecast considerably lower crude oil prices throughout both Q4 2019 and the whole of 2020. More specifically, it was estimated that crude oil prices would decline by $2/bbl to an average of $60/bbl this year, and this was without factoring in the impact of the Coronavirus.
The Short And Long-Term Impact Of The Coronavirus
At the beginning of the Covid-19 outbreak, oil prices fell further on the back of falling demand in China and the neighbouring Asia-Pacific states.
However, the virus has now evolved into a global pandemic, wreaking havoc across Europe and in high-volume oil producers like Iran. As a result of this, and the rapid pace at which people are now being infected throughout the world, Oanda reported that U.S. West Texas Intermediate crude oil prices slid by more than 10% on Monday to a paltry $28.03 bbl.
The Brent crude price, which currently sets the international benchmark, dropped by 12% to $29.74, which was its lowest level since the great crash in February, 2016.
With medical experts predicting that we’re still at least a few months away from a scenario where the number of confirmed cases peaks, it’s likely that oil prices will decline further in the weeks to come, or least plateau below the $30 bbl mark.
Not only this, but it’s highly unlikely that prices will stabilise at the $60/bbl mark forecasted by the EIA before 2020 is out, even though some of the recent losses could be clawed back if the Covid-19 outbreak is curtailed during the warmer summer months.
Ultimately, the volatile and declining nature of the oil market is likely to see investors take flight in 2020, with little light relief expected over the course of the next three quarters.
Of course, CFD traders who thrive in volatile markets may relish the opportunity being provided by oil at present, but the window of opportunity for short-selling may have passed as prices continue to approach rock-bottom.