The panic over the spread of coronavirus around the world was the catalyst for a sell-off in the stock and commodity markets. The main US stock indices dropped by more than 3%, the S&P 500 lost about $1 trillion in capitalization, the volatility of black gold increased, and prices returned to the area of minimum marks since December 2018. For the first time in almost a decade, global oil demand may decline, which allows the “bears” on Brent and WTI to keep the market under their total control.
The dynamics of the volatility of oil
Cases of mass infection in Italy, South Korea and Iran suggested that the epidemic could become a pandemic, the spread of which would weigh heavily on the shoulders of the global economy. Currently, 10 times more people are infected than in 2003, and the quarantine in areas of Italy such as Lombardy and Veneto will affect the entire country. They account for about 25% of the consumption of all petroleum products and 30% of GDP. As a result, Rome may face a recession, because gross domestic product decreased by 0.3% q/q in the fourth quarter.
According to the estimates of the largest oil trader Vitol, due to the coronavirus, the demand for oil in China decreased by 4 million b/d in February, which is equivalent to 4% of the world’s consumption of black gold. At the end of the first quarter, we can talk about 200 million barrels. In addition, due to the abnormally warm winter in Europe (the temperature is 3.1 degrees Celsius above average), the demand for fuel is reduced, which deducts about 700 thousand b/d from the total oil consumption. Vitol predicts that the victory over coronavirus will allow global oil demand to recover in the second quarter, but so far the situation for the “bulls” on Brent and WTI looks deplorable.
The dynamics of global oil consumption
It is obvious that the current cuts in OPEC+ production volumes are not able to compensate for the drop in global demand. The cartel and other countries will discuss additional cuts for 600,000 b/d in early March, but it is already clear that Russia is not eager to provide additional preferences to American producers. The Russian budget is able to withstand oil at $40 per barrel, and the reduction in production is a voluntary loss of its market share. As a result, the alliance of Saudi Arabia and Russia risks breaking up for some time. Riyadh is considering this option as a plan B and is actively pushing Kuwait and the UAE to jointly reduce production by 300 thousand b/d.
Thus, the oil market operates in the “we will live badly, but not for long” mode. The recovery in global demand in April-June may push the price of black gold significantly higher. It remains to determine where the bottom is for Brent and WTI.
Technically, the daily chart of the North sea variety shows the transformation of the “Shark” pattern to 5-0. The rebound from the 38.2% Fibonacci resistance from the CD wave allowed short positions to be formed. If the February minimum is updated, the AB=CD model will be activated with a 200% target.
Brent, the daily chart