Oil Rebounds But Coronavirus Worries Persist

Oil prices rebound following yesterday’s plunge. At one point, WTI oil almost reached $20 per barrel, while Brent oil traded below $25 per barrel. The rebound itself is not surprising after such a major sell-off.

In addition, the U.S. announced that it will initially buy 30 million barrels of oil for strategic reserve. Previously, U.S. President Donald Trump promised to help domestic oil producers, and it did not take long to start to act on this promise.

The reserve capacity allows an additional purchase of 77 million barrels, so the 30 million barrels may be just the first step in U.S. attempt to stabilize prices for domestic oil producers. This move makes sense both as a means to support local industry and as a way to replenish reserve at prices not seen since 2003.

However, I don’t think that the move will help oil much. As I mentioned in my previous article, Goldman Sachs estimated that demand for oil may fall by 8 million bll/day by late March because of the measures to contain coronavirus.

At this point, it looks like these measures will be expanded as the virus spreads across the world. Thus, the blow to oil demand may be even worse than originally expected.

Until recently, financial markets suffered from complete uncertainty regarding coronavirus as too little time has passed for researchers to assess the potential spread of the epidemic and the various containment measures.

However, this has recently changed since researchers from Imperial College of London published their latest analysis regarding the potential impact of the various containment measures on the spread of the epidemic.

Their conclusion is that mitigation strategies (other than a hard lockdown) will lead to overwhelmed hospitals. In such a situation, doctors will have to prioritize whom to save. If these findings are correct and, more importantly, if governments agree with them, we should expect serious lockdowns in those parts of the world which are materially hit by coronavirus.

According to the research, the bad news is that even a hard lockdown will end with another wave of new coronavirus cases once it is lifted. In short, all scenarios present a challenging picture both for the world economy and for oil demand.

We’ll likely see more coronavirus models being developed and get more data. I’m not insisting that the above-mentioned research of the Imperial College of London is a truth carved in stone.

However, I believe that traders and investors should keep in mind that there’s a material possibility that the blow to the oil demand may be rather long-term in nature.