From stocks to bonds and currencies, the coronavirus outbreak is rocking all corners of financial markets. For oil producers, the pain has been particularly acute.
With demand dissipating, oil has plunged into a bear market, putting pressure on OPEC to step in and attempt to stabilize prices. But as the coronavirus continues to spread around the world can the cartel really play the savior?
That’s the question this week, as OPEC members and allied producers gather in Vienna for meetings on Thursday and Friday.
The backdrop: Brent crude futures, the global benchmark, finished Friday at $50.52 per barrel, down 13.6% for the week. US oil was trading at $44.76, a 16.2% weekly decline. Prices haven’t been that low since late 2018.
Why OPEC needs to act: The economies of some OPEC members are reliant on crude production, and the coronavirus has sharply reduced demand for products such as gasoline and jet fuel. To keep prices from dropping further, OPEC may turn to what has become its preferred strategy in recent years: coordinated production cuts.
Giovanni Staunovo, an analyst at UBS, thinks that may not be enough to alter oil’s trajectory in the near term. “I’m not sure this [would be] sufficient to change the negative market sentiment,” he told me. “What is cheap can get cheaper.”
Bright spot: Staunovo points out that oil prices aren’t sustainable for long at their current level. Within six months and a year, lower business investment across a struggling industry will restrict supply, helping to prop up prices, he said. Plus, bargain crude will eventually stimulate demand.
Oswald Clint, an analyst at Bernstein, agrees that prices will need to push higher before long. He thinks that an OPEC cut of 1 million barrels per day would be sufficiently supportive, especially given falling oil production in countries like Norway that predated the coronavirus outbreak.
But both Staunovo and Clint agree that oil markets need a bailout from OPEC — and soon.
Stocks just had a brutal week. The next one may not be easier
US stocks recovered some losses in the late hours of trading on Friday after Federal Reserve Chairman Jerome Powell put out a rare statement. “The fundamentals of the US economy remain strong,” he said, while acknowledging that the coronavirus “poses evolving risks to economic activity.” The central bank, Powell said, will “act as appropriate to support the economy.”
Will that reassurance be enough to help markets stabilize this week? It’s hard to say. After years of persistently low interest rates, investors are worried that central banks lack sufficient ammunition to stave off a crisis.
“An interest rate cut in this environment will arguably do little to affect real economic activity,” Morgan Stanley economist Ellen Zentner told clients Friday.
And the market remains driven by news of how the outbreak is moving around the world, as well as how it’s hitting businesses and economies. On Saturday, China said that factory activity in February hit the weakest level on record, and the first person died from the coronavirus in the United States.
Justin Onuekwusi, a fund manager at Legal & General Investment Management, told me that his team — which manages $84 billion in retail multi-asset funds — has reduced its exposure to stocks and the Korean won.
“We don’t feel the market has certainty on this,” he said. “The impact on Chinese growth and the rest of the world is potentially quite huge.”
Monday: US and China manufacturing data; JD.com and Tilray earnings
Tuesday: Japan consumer confidence; US auto sales; Kohl’s, Target and Nordstrom earnings
Wednesday: US services data; Abercrombie & Fitch, Campbell Soup and Dollar Tree earnings
Thursday: OPEC meeting; Kroger, American Outdoor Brands and Costco earnings
Friday: OPEC meeting; US jobs report