-The sky is falling. The sky is falling.
-Wood Mac: A $10 hit to Brent means a $40 billion hit to quarterly cash flow.
A sense of gloom has clearly set in for oil markets, with Brent falling some 8% over the first three trading days of the week. If the trend continues, it could rival the September drop triggered by attacks on Saudi Aramco. Demand destruction from the coronavirus is spreading to major economies, with the US now on edge from a case of unknown origin.
Brent crude was trading at $51.29 per barrel as of 8 a.m. ET, down some 2.8% from the previous close. A 2.7% dip on Wednesday came even as the EIA reported a drain on crude oil inventories that was less than analysts expected. The commodity was hammered in early trading amid confusion over the US response to the coronavirus. Phil Flynn at The Price Futures Group in Chicago said the spread of the virus and the subsequent demand destruction has led to “horror thinking” on the floor.
US President Donald Trump said late Wednesday that the risk to the American people from the respiratory ailment was “very low.” Speaking to Reuters, however, Peter Marks with the US Food and Drug Administration said the US should be on the “alert to the possibility of a pandemic.” US House Speaker Nancy Pelosi said the Trump administration offered a “chaotic response” to the health emergency. Overseas, French President Emmanuel Macron said “we have a crisis before us.”
Echoing calls from the International Monetary Fund, the OECD in a joint report with the International Institute for Applied Systems Analysis called for a collective response to the spread of the virus.
“The interconnected nature of the challenges the world faces today means that no country can overcome them on its own,” a note in the report read.
Management fatigue, however, means several major economies, from the United States to the United Kingdom, are retreating from the liberal world order. The economic impacts from the coronavirus have only added insult to injury, with fourth quarter earnings reports disappointing for many companies. Oilfield services company Hunting reported a $19 million impairment in its quarterly report on Thursday. The company blamed a slowdown in US shale operations for part of the decline, though Chief Executive Jim Johnson said Asian markets were worth watching.
“The outlook for 2020 remains uncertain, as over half of all operators have yet to publish budget spend guidance due to continued uncertainty over commodity prices,” he said in a statement.
Wood Mackenzie added in an emailed report that a $10 per barrel dip in Brent, which is more or less the loss since the start of the year, means a $40 billion hit to global cash flow per quarter.
“For some companies, this could make the difference between increasing shareholder distributions or another year of negative cash flow,” head of upstream analysis Fraser McKay said.
European markets were getting hammered as new infections spread through the continent. The situation for China, however, may be improving as shipping bottlenecks ease. Brent got no support from US economic data. Fourth quarter GDP increased only 2.1% as expected, durable goods orders dipped 0.2%, initial jobless claims increased, personal consumption is looking slower and Kansas City Fed district manufacturing is on track for a dip.