U.S. West Texas Intermediate and international-benchmark Brent crude oil futures hit multi-year lows on Friday and were set for their steepest weekly decline in more than four years as the spread of the coronavirus raised fears of a global recession and consequently lower demand for crude oil and other refined fuels.
Benchmark Brent crude, which fell about 2% on Thursday, has lost around 13% this week, putting it on track for its steepest decline since January 2016. The front-month April contract expires later on Friday.
“Brent crude under $50 a barrel will be a nightmare scenario for OPEC and may well provoke a … response of some kind from the core grouping,” said Jeffrey Halley, a senior market analyst at brokerage OANDA.
Still Hope of Rebound in Demand
Some market participants are expecting the recent sell-offs to be reined in as soon as the demand fears wane. Furthermore, with coronavirus cases in China beginning to slow, the country may soon return to full production, while the spread of the virus runs its course throughout the rest of the world.
“We have to believe that the COVID-19 virus will be contained sooner rather than later. I’m optimistic we should see some positive news by mid-next week at the latest,” said Sukrit Vijayakar, director of energy consultancy Trifecta.
“Subsequently, the sudden drop in demand will rise back just as suddenly, to at least 75% to 90% of prior levels. The rise back will be spurred by current low prices.”
The markets are getting pretty close to levels that will become attractive to speculators, but there has to be a catalyst to get the markets moving higher. China’s PMI data over the week-end are expected to come in weak, but that news may already be priced into the market.
News from China started the selling, and news from China is likely to ignite the rally. If you believe the data, the virus may be subsiding in China and the country may start to go back to work. Once investors know the duration of the virus then they’ll be better able to figure out when the outbreak is likely to end in the rest of the world. This will then encourage more buying in crude oil along with extremely cheap prices.