The oil market welcomed 2020 on a gloomy note. After a failed attempt to hold above $70 per barrel, Brent quotes demonstrated a downward correction, which subsequently developed into a full-fledged bearish rally. As a result, in the first month of 2020 alone, Brent lost $10.5, or about 15% of its value, falling to $59.5 per barrel.
At the beginning of January, interest in the oil industry was bolstered by the events in the Middle East and growing political uncertainty. To recap, Qassem Soleimani, an Iranian Major General in the Islamic Revolutionary Guard Corps, was killed as a result of the US drone strike near Baghdad airport. Following the airstrike and Soleimani death, Iran’s Supreme Leader Ayatollah Ali Khamenei vowed harsh revenge, in response to which US President Donald Trump threatened to strike more Iranian targets if Tehran takes retaliatory measures. The likelihood of an open conflict between Tehran and Washington made the investors seriously consider the scenario where the next military campaign in the Middle East would inevitably lead to interruptions in oil supplies from key Islamic producers, which would create a shortage in the global oil market. However, there was no further escalation to this conflict and traders settled down. But not for long. The markets were faced with an even greater threat, which produced a destructive effect on stock markets and investor sentiment.
The global panic around an unidentified virus causing pneumonia outbreak is spreading. The city of Wuhan, the epicenter of China's coronavirus outbreak is still in quarantine - this measure was adopted in an effort to contain the coronavirus epidemic with nearly 5,000 people infected and more than 100 dead. On Monday, Beijing and Hainan reported the first deaths from a viral infection. Coronavirus cases have been also confirmed in Mongolia, South Korea, Thailand, Germany, France and the United States. Active social media users and health experts criticize local authorities for their lack of pandemic preparedness, which, according to scientists, emerged from a wet market at the end of last year.
Goldman Sachs (NYSE:GS) forecasted a decrease in daily oil consumption by 260 thousand barrels, including a decrease in demand for jet fuel by 170 thousand barrels per day, based on the SARS impact on oil demand in 2003. A significant China’s share of global oil consumption is explained by the fact that China holds the status of a key importer of hydrocarbons. It is worth noting that the virus negatively affects not only the industrial demand for raw materials but also consumer activity. S&P Global (NYSE:SPGI) Ratings warned that if Chinese spending, a key factor in economic growth, drops by 10%, overall GDP growth will drop by about 1.2%. Thus, the oil market has been hit twice as hard. On the one hand, oil quotes are pressured by the general reluctance of traders to take risks, which leads to the selloff in risky assets. On the other hand, oil decrease is caused by the fears of falling demand from China.
The situation is aggravated by the fact that there is too much oil in the world. The issue of oversupply was raised by Fatih Birol, Executive Director of the International Energy Agency (IEA), at the World Economic Forum meeting in Davos. According to him, the global oil surplus will exceed one million barrels per day in H1 2020.
With that said, oil buyers are unlikely to win the fight against weakening demand and oversupply, which means that bears will continue to dominate the market. We recommend using this momentum and expect a decline in Brent oil below $ 50 per barrel.