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$3 Hit To Oil From Coronavirus? Goldman Says Yes. Here's Why

By Investing.com (Barani Krishnan/Investing.com)CommoditiesJan 22, 2020 04:41AM ET
www.investing.com/analysis/3-hit-to-oil-from-coronavirus-goldman-says-yes-heres-why-200500430?utm_source=Desktop%20Notifications&utm_medium=referral
$3 Hit To Oil From Coronavirus? Goldman Says Yes. Here's Why
By Investing.com (Barani Krishnan/Investing.com)   |  Jan 22, 2020 04:41AM ET
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In any crisis, it’s good to have as many facts in hand as possible for contingency planning. Thus, Goldman Sachs’ prophecy that oil prices could lose $3 per barrel from the new coronavirus that’s finally arrived in the United States is a necessary, even if alarming, prediction to know.

Goldman’s analysis of the impact from the 2019-nCoV — shorthand for the virus — is based on its study of the fallout to crude oil from the SARS epidemic that began in Asia and shook the rest of the world in 2003.

A 17-year-old example for a present day crisis? Yes, because it’s the only one available and the most relevant, says Goldman, which has more pedigree in oil than any Wall Street bank.

“While estimates at this point remain highly uncertain and we take no view on its development, we leverage the 2003 SARS epidemic to illustrate the potential impact on oil demand,” it said.

Even Larger Selloff Likely

Adds Goldman:

“Such a demand impact (without an OPEC supply response) would point to an only $3/bbl impact on oil prices, although the initial high uncertainty could lead to a larger sell-off, as was the case in March 2003.”

Interesting. That means oil could even dip by as much as $6 per barrel — as it did at the height of the SARS epidemic in 2003, based on historical Investing.com data — before OPEC does something drastic to pull the market back higher.

WTI Weekly Prices, 2001-2005
WTI Weekly Prices, 2001-2005

The year SARS hit was a volatile one for oil, although prices did not go above $40 or below $25 for a barrel of West Texas Intermediate, which was then the global crude benchmark before the preeminence of Brent in 2010.

A Bloomberg chart from 2003, shared across oil trading desks on Tuesday as the first U.S. case of the 2019-nCoV was made known, stressed the same point about the near 40% downswing in WTI that year.

Worst SARS Hit On Oil Was 17% Loss In A Month

Investing.com’s data itself shows March and April to be worst months for WTI in 2003 — taking hits of 15% and 17%, respectively. Despite the volatility, the market actually ended the year up 4%, closing at $32.52 versus the $31.20 finish of 2002.

“Looking back at the SARS epidemic, this uncertainty indeed left markets and forecasters initially pricing and assuming a much larger impact than eventually occurred, with oil down nearly 20% at its trough,” Goldman said.

“This elevated level of fear ultimately subsided when the pace of new cases reported slowed, with a total duration of the epidemic outbreak of 5 months, before a quick recovery in regional activity.”

Breaking down the potential impact from the 2019-nCoV, Goldman anticipated a 260,000-barrels-per-day negative shock to global oil demand on average, including a 170,000-bpd loss of jet fuel demand.

Jet Fuel Most Vulnerable

Goldman said the biggest hit on real energy demand might be to jet fuel as air travel declines.That was the case in 2003, when jet regrade, the relative strength of jet fuel prices versus gasoil, declined in March 2003, the Wall Street bank said. It added:

“We would expect similar price responses this time, with jet cracks and regrade both already selling off as of Tuesday. The pressure on jet cracks could in fact be exacerbated by the current high level of jet refining yields, jet’s recent outperformance relative to distillates in the U.S. and Europe and above seasonal distillate inventory builds so far this year.”

Fears that the China-originated 2019-nCoV could disrupt travel and commerce, and slow economic growth sent a chill through global risk markets on Tuesday.

WTI Weekly Price Chart
WTI Weekly Price Chart

Asian stocks hard were hit hard, and copper and oil prices sank, as investors rushed into safe havens like U.S. Treasurys and German bunds.

So far there have been nine deaths and more than 400 documented cases, mostly in China’s Hubei province, which is home to Wuhan — the epicenter of the crisis.

Mixed Views On Impact

Some analysts said while it’s still early, the virus does not seem to be as lethal as SARS, which killed about 10% of patients.

“For now, we are keeping our economic forecasts for this year unchanged, but the spread of the virus is clearly a major downside risk and we will continue to monitor the situation closely,” Capital Economics senior economist Gareth Leather was quoted saying by CNBC.

Others, like iconic hedge fund manager Paul Tudor Jones, disagree.

“We’ve got a curveball with this coronavirus. I think that’s a big deal. If you look at what happened in 2003, estimates ranged 0.5% to 2% in GDP for China, half a percent for Southeast Asia,” Jones told CNBC’s “Squawk Box” at the World Economic Forum in Davos, Switzerland.

“Stock markets sold off double digits. If you look at the escalation of the reported cases, it feels a lot like that.”

$3 Hit To Oil From Coronavirus? Goldman Says Yes. Here's Why
 

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$3 Hit To Oil From Coronavirus? Goldman Says Yes. Here's Why

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Comments (7)
Vin Rampersad
Vin Rampersad Jan 24, 2020 11:37AM ET
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Oil price will head higher when the Big Players want it to go higher.
Dev Nandan
Dev Nandan Jan 23, 2020 5:30AM ET
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The supply and demand zone is oil to be $55 -$65.00
Chung Ming Boyce WAN
Chung Ming Boyce WAN Jan 22, 2020 7:43PM ET
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Do u think wti will drop lower than 55.9? will the market oversell now in the shadow of the new virus? i suppose us economy still goin not bad isnt it? thank you
abhishek das
abhishek das Jan 22, 2020 12:47PM ET
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Highly informative and insightful article.
Barani Krishnan
Barani Krishnan Jan 22, 2020 12:47PM ET
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Thanks, Abhisek. What are your thoughts on Brent near-term? As much as I'm the analyst, I also love hearing what my readers have to say, as they are the ones usually with skin in the game :)
Joseph Sherwood
Joseph Sherwood Jan 22, 2020 10:15AM ET
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Great info!  I believe this analysis is impacting WTI's dip.  Also we're moving below the 100 & 200 DMA.  A break in the 3+ month bullish trend could install a bearish trend.  When combined with non-OPEC production increases, lower GDP projections on China, and potential Trump re-election keeping US oil pumping out WTI could suffer a severe hit.
Barani Krishnan
Barani Krishnan Jan 22, 2020 10:15AM ET
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Thanks, Joseph. Yes, the odds are against an oil rally ... in the immediate term at least.
Crude Prince
Crude Prince Jan 22, 2020 4:59AM ET
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Im trapped. Any idea $62 sir?
Mubarak Ali
Mubarak Ali Jan 22, 2020 4:59AM ET
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bro wait for news or bomb unless it won't go up
Barani Krishnan
Barani Krishnan Jan 22, 2020 4:59AM ET
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You are right. There is no catalyst for oil rally as of now. The US fuel stockpile situation and this coronavirus is ruling the tide.
Ali Pal
Ali Pal Jan 22, 2020 4:59AM ET
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in a week things will move other way
Barani Krishnan
Barani Krishnan Jan 22, 2020 4:59AM ET
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Ali Pal  We'll have to see. Oil is looking for a catalyst now to get back up. OPEC, having denied the label of a cartel, is trying to prove itself not market manipulative at a whim.
Mubarak Ali
Mubarak Ali Jan 22, 2020 4:50AM ET
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barani brother around 5 to 7 days I am waiting oil not at all moving downside previous article u said it will go down still not breaking wti 57 dollars???? any ideas pls say
Barani Krishnan
Barani Krishnan Jan 22, 2020 4:50AM ET
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Patience, brother Mubarak :) Maybe tomorrow's EIA will lead to a decisive move. Another significant build in gasoline/distillates could.
 
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