Investors are in for what could be a volatile year for crude oil prices, with a trio of catalysts tugging in different directions on demand for the energy source.
These three drivers include the Wuhan coronavirus, OPEC+ output adjustments and mounting outcry against the use of fossil fuels for their role in contributing to climate change, according to Regina Mayor, KPMG global head of energy.
The Wuhan coronavirus outbreak has been the most visible driver of crude prices as of late, sending prices tanking as concerns that the China-originated disease will impact purchases from the world’s largest oil demand center.
As the number of confirmed cases and fatalities from the coronavirus climbed, West Texas intermediate crude oil prices (CL=F) fell nearly 15% in the just month-long year-to-date.
“It is pretty troubling because we’ve seen a $10 per barrel drop, 15%, in just a few weeks, largely due to concerns about demand, even though the demand destruction right now is estimated about 300-500k barrels per day, which is a tiny blip in the total 110 million barrels per day that we use,” Mayor told Yahoo Finance’s On the Move Thursday.
“What concerns me is the trajectory of this virus,” she added. “I don’t think we’ve seen the actual demand destruction that will ultimately take place with the reduction in consumer and business activity with all the things that you’ve mentioned with how the virus is spreading.”
Plus, markets tend to overemphasize downside demand destruction risks and underestimate supply side destruction risks when it comes to pricing oil, leading to a typical downward bias in prices, Mayor said. That’s been the case in other recent events of geopolitical shocks like the Iran crisis earlier this month, when the U.S. killing of a top Iranian general immediately sent prices spiking higher before rhetoric downplaying fears of a full-blown military conflict sent oil prices sinking lower.
“We’ve seen the $5 per barrel decline even before the virus was announced,” Mayor said. “And since then, we’ve seen an even more precipitous decline.”
Amid the virus, Mayor believes oil prices could fall to a low $50-per barrel range for West Texas intermediate crude and a mid-$50 range for the global benchmark Brent (BZ=F), before recovering.
At the same time, the Organization of Petroleum Exporting Countries wields some power to stabilize global oil prices by manipulating supply, potentially offsetting some of the price declines triggered by the coronavirus, Mayor said.
Some members of the 23-nation coalition were considering moving their previously scheduled March 5-6 meeting forward to February, according to reports this week, in response to the oil price impacts seen by the coronavirus.
The implication is that the group would use the earlier convention to deepen a supply cut of 1.7 million barrels per day it had agreed back in December to enforce. Each time OPEC+ pulled forward its meetings over the past decade, the group decided to further curtail supplies to help prop up crude oil prices.
Debate abounds over whether OPEC+ today can meaningfully move the needle on prices in the current massive global oil market. However, the group nevertheless has more flexibility in making quick changes to supply than its U.S. counterparts, Mayor said, making it an important lever on the supply-side.
“I don’t think domestic U.S. producers can be as agile as OPEC+ can be. Their capital budgets have been constrained, access to financing has been constrained, so we have seen Permian growth, production growth rates, on a definite decline,” Mayor said, referring to the slowdown in activity in the U.S. Southwest’s once-booming Permian Basin. “So it’s still growing but it’s definitely not growing in the way it was growing even 12-18 months ago. So I don’t think we’ll see a supply response that can be as rapid as what OPEC plus can do. And that’ll help overall with some of the supply side challenges.”
All else aside, a growing chorus of stakeholders demanding that asset managers divest from fossil fuel exposure to address climate risks has further pressured the energy industry.
BlackRock (BLK), the world’s largest investment company, said earlier this month it would exit investments with “high sustainability-related risk” like thermal coal and would launch new fossil-fuel investment products. These kinds of corporate moves, along with amplifying rhetoric from activists calling for a low-carbon economy, have started to spook the oil industry, Mayor said.
“They are very concerned about it, and they are taking action,” she said. “I would say there are two types of responses. There’s one that’s perhaps more of a ‘Big Oil’ type of response, and I don’t mean that at all in a negative way, but you’ll hear phrases like, ‘We need to decarbonize the hydrocarbons’ – because let’s be real, fossil fuels are very important and a real part of our value chain, and they provide power to the planet, but how do we decarbonize that source of fuel?”
“Then we also hear this sort of ‘big energy’ response, which is we’re going to focus on electrification, we’re going to more quickly pivot away from gas, it’s not the bridge fuel,” she added. “The industry is responding on both fronts. They are taking very rapid action, but the crescendo of the messaging is so loud now, the question becomes, can they respond quickly enough and will investors be patient enough with that pace of changes?”
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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