The coronavirus pandemic has been roiling oil markets. On its third worst day on record, the U.S. West Texas Intermediate crude plunged 24.4% to settle at $20.37 per barrel on Mar 18. This also marked the index’s lowest since February 2002. Meanwhile, slipping to the lowest level since 2003, the Brent crude lost 14.1% to trade at $24.67 on the same day. Market participants believe that the oil market is dealing with dual blows of supply and demand. On one hand, the slowdown in global airline industry and fears of economic recession are resulting in waning demand for crude oil. On the other hand, Saudi Arabia and Russia are at loggerheads and ready to ramp up output.
Let’s take an in-depth look at the factors affecting the oil markets.
Coronavirus and Oil Markets
The coronavirus-induced shutdowns have been escalating in the United States, as more than 8,700 people have tested positive and atleast 110 have died. All 50 states in the United States and the District of Columbia have confirmed cases. Globally, the number of infected cases has risen to more than 200,000. The outbreak has disrupted global supply chains and economic activities. Moreover, analysts are increasingly speculating a global recession. The rapid spread of the virus is leading to sweeping travel bans, cancelation of large events and conferences and shrinking factory activities. In fact, JPMorgan estimates that a recession will hit the U.S. and European economies by July. Analyzing the current gloomy scenario, Rystad Energy’s analyst has said, “this is the most dismal oil demand picture we have witnessed in a long time with a simultaneous collapse in jet fuel, gasoline, shipping fuel, petrochemicals, and oil used for power generation” (read: ETFs at Risk as Oil Slides to 13-Month Low on Covid-19 Scares).
Saudi Arabia-Russia Oil Price War
Russia did not agree with Saudi Arabia’s proposed plan to cut production to manage the impact of coronavirus. As a result, Saudi Arabia took a surprising decision to increase crude output starting next month. It now intends to raise oil output from next month, probably more than 10 million barrels a day, as a response to the breakdown of the OPEC+ alliance with Russia. Saudi also cut its export prices to encourage more buying from refiners. This will definitely trigger a price war in the oil market.Notably, the current output cut program will expire at the end of March, meaning OPEC+ can produce as much oil as they want beginning Apr 1. In this regard, Bank of America has noted, “the oil market is about to flood with surplus barrels” (read: Bull & Bear Tug of War for Oil: ETFs in Focus).
Analysts believe that the WTI and Brent crude are on track for their weakest monthly performance and can lose 54% and 50%, respectively. Moreover, Goldman Sachs has lowered its oil estimate for the second quarter projecting WTI and Brent to average at around $20 per barrel. The global investment bank believes that there has been a decline of around 8 million barrels per day in oil utilization (read: Goldman Forecasts Waning Demand: Oil ETFs to Lose).
Oil ETFs That Might Lose
Against this backdrop, investors can take a closer look at the oil commodity space and related ETFs (see all Energy ETFs here).
United States Oil Fund (USO - Free Report) — down 63.2% year to date
The United States Oil Fund seeks to track the daily price movement of WTI light, sweet crude oil (read: Wall Street Enters Bear Market: ETFs That Are Near 52-Week High).
AUM: $1.48 billion
Expense Ratio: 0.73%
Invesco DB Oil Fund (DBO - Free Report) — down 48.8%
The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return, plus the interest income from the holdings of primarily U.S. Treasury securities and money-market income-less expenses (read: Virus Scare Weighs on Oil ETFs: Go Short for the Near Term).
AUM: $244.9 million
Expense Ratio: 0.78%
United States Brent Oil Fund (BNO - Free Report) — down 57.3%
The fund tracks the daily price movement of Brent crude oil.
AUM: $86.8 million
Expense Ratio: 0.90%
U.S. Commodity Funds United States 12-Month Oil (USL - Free Report) — down 50.8%
The fund replicates with possible accuracy the movement of West Texas Intermediate light, sweet crude oil.
AUM: $38.4 million
Expense Ratio: 0.82%
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