Coronavirus has caused an 'oil demand shock' to prices: Goldman Sachs

Brian Sozzi
Editor-at-Large

If Goldman Sachs strategists are right, the coronavirus will probably wreak havoc on the bottom lines of major oil producers in the first half of 2020 due to the plunge in crude prices.

Brent crude oil prices have tanked $11 a barrel since the start of the coronavirus outbreak in China, points out Goldman. U.S. crude oil prices touched bear market territory on Monday, falling some 20% from a recent high on Jan. 6.

With the Chinese economy at a virtual standstill as the government battles the coronavirus, investors have fled crude oil on fears of excess supply due to waning demand. The same could be said for other commodities such as copper, but oil without question is the most prominent.

“With this move driven by a flattening of the forward curve, the market is effectively pricing in a large oil demand shock. Estimating this hit to demand remains challenging given the uncertain trade-off between the aggressive policy response and the duration of the outbreak,” wrote Goldman strategist Damien Courvalin in a new note to clients. In addition, prices are now at levels where we expect a supply response from both OPEC and U.S. shale producers, pointing to only modest further downside potential.”

OPEC+ is reportedly eyeing a 1.8 million barrel a day emergency production cut to stabilize the market.

The advertising label of the Organization of the Petroleum Exporting Countries, OPEC, shines at their headquarters in Vienna, Austria. (AP Photo/Ronald Zak)

While Goldman is a bit more optimistic on the near-term downside remaining for crude, Citi is the opposite.

Citi cut its oil prices forecasts for three quarters of 2020 on Monday. The investment bank thinks the downside risk to oil prices could be around $47 a barrel.

The cratering of crude has pressured oil stocks across the board.

Shares of ExxonMobil and Chevron are down about 14% year-to-date. Oilfield services play Schlumberger has shed 17% this year.

Oil execs may be bracing investors for tough times ahead.

“As I've mentioned before, we intend to win in any environment. We're not making excuses for tough commodity prices or margins,” Chevron CEO Mike Wirth told investors on a recent earnings call. 

Said ExxonMobil CEO Darren Woods on a call the same day, “We are using the 2019 price environment to challenge ourselves to further optimize the portfolio and drive greater efficiencies.”

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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