Energy Insights – Coronavirus and the Outlook for Oil

Oil Market Brief:
Coronavirus and the Outlook for Oil

March 3, 2020.
Updated March 9, 2020.

Uncertainty regarding how the Coronavirus impacts oil demand – from travel interruptions to factory shutdowns – has created worldwide concern.  With the price of oil largely hinging on the balance of supply and demand, the drop in oil price was not surprising.  Recent declines reflect uncertainty over how significant the spread of Coronavirus will be – or how long it will last.

Have Oil Fundamentals Changed?

The concept of Fundamental vs. Technical trading is nothing new when it comes to moving the price of any stock – or in this case, the oil commodity.

Technical trading generally uses historical patterns and data to predict price movements, while fundamental trading focuses on the quality of a stock or sector.  As a result, technical analysis is typically considered short-term focused while fundamental analysis is more long-term.

Often when you see a significant run-up or selloff of a stock or commodity in a short period of time – such as the gains in Tesla stock earlier this year or Bitcoin in late 2017 – it’s often a technical event fueled by the anticipation of a significant gain or loss in the underlying price.

A closer dive into the fundamentals of the oil market showed several bullish signs prior to the Coronavirus outbreak.

Highlights from the Energy Information Administration’s (EIA) February 2020 Short-Term Energy Outlook concluded:

  • US daily oil production are showing signs of leveling-off as US oil output fell in December 2019.
  • According to Baker Hughes on February 28, 2020, the number of oil and natural gas rigs drilling new oil and natural gas were 248 lower than one year ago.  The downward movement in rig counts typically creates a boost in oil pricing.
  • The balance of worldwide oil supply and demand is projected to continue to tighten over the next 18 months, with 6 of 8 quarters projecting a draw in oil inventory.

Prior to the Coronavirus outbreak, Brent crude oil spot prices averaged $64 per barrel (b) in January, down from $4/b from December. Brent prices fell steadily through January and into the first week of February, closing at less than $54/b on February 4, the lowest price since December 2018. The EIA forecasts Brent prices will average $61/b in 2020; with prices averaging $58/b during the first half of the year and $64/b during the second half EIA forecasts the average Brent prices will rise to an average of $68/b in 2021.

Similarly, the assumption that oil demand will fall sharply because of reduced travel may not be accurate.  As travelers avoid airports, automobile travel may increase.  In fact, the average plane trip has been more fuel efficient than the average car trip since as far back as 2000, according to calculations from a University of Michigan study on passenger movements over the last 40 years.  To make driving less energy intensive than flying, the entire fleet of light-duty vehicles would have to boost its fuel economy from the current average 21.5 mpg to at least 33.8 mpg—a 57% increase. Or, the “vehicle load” (the number of persons aboard) would have to increase from the current average 1.38 persons to at least 2.3 persons.

Have Health Epidemics Impacted Oil Prices Previously?

Health epidemics are nothing new when it comes to impacting the global economy and oil prices.

Shown in the charts below, a historical look at how sudden epidemics have impacted oil show that the oil market may be poised for a significant comeback in the months ahead.

How Does Coronavirus Impact Direct Energy Investors?

Recent changes in oil pricing and the fallout from the Coronavirus bring to light a few key points when it comes to investing in direct oil and natural gas projects within a well-diversified investment portfolio.  Highlights include:

  1. Alternative investments – and direct oil investments specifically – provide portfolio diversification and the ability for investors to invest a portion of their assets outside of traditional equities and bonds.  This can reduce stock market correlation – or how assets move in relationship to each other – and the downside risk of technical trading (as described above) impacting portfolio returns.
  2. Since alternative investments are typically structured to be long-term focused, short-terms fluctuations in pricing often has only have a temporary effect – if any – on asset values and returns.
  3. Disruptions in oil pricing that persists for a long period could create new opportunities to acquire existing assets or drill new acreage at a discount from their market value.  Energy companies and funds that offer low levels of debt, the technical expertise to operate assets, access to capital, and solid financial positions will be in a significantly stronger position for growth if less-than-stellar oil pricing remain.

What’s Next?

Like epidemics in the past, it’s likely that the spread of the Coronavirus – while extremely serious from a health perspective – will decrease in the coming weeks from an economic perspective as health professionals focus on “flattening the curve”.  The greater unknown is if the Coronavirus will be the event which drags the US economy into a long term recession, which would hurt oil demand and keep prices low.  If the US economy and stock market bounce-back over the coming weeks and months, expect to see similar bounces in oil pricing.

On March 6, OPEC and OPEC+ members (namely Russia) meet.

What Is The Impact On Specific U.S. Energy Partnerships?

For specifics regarding how recent events impact past, current and future U.S. Energy investments, please reach out to us with questions and concerns by calling: 800-636-7606  |  Wholesaler Territory Map

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Important Disclosures
This information contained in this document is for informational purposes only. It does not constitute an offer to sell or a solicitation of an offer to buy any security. Such offers can only be made by a Private Placement Memorandum to accredited investors. Oil and gas investments involve a high degree of risk and are not suitable for all investors. You should purchase these securities only if you can afford a complete loss of your investment. Please refer to the Risk Factors section of any specific Private Placement Memorandum. The equipment pictured in this brochure is not owned by, and will not be owned by U.S. Energy Development Corporation or its partnership(s), unless otherwise noted. The assets pictured within this brochure accurately represent the assets U.S. Energy or its partnerships may own. Please refer to the Areas of Operation section of any specific Private Placement Memorandum.  Past performance is not an indication of future results.   Securities sponsored by U.S. Energy Development Corporation are offered through Westmoreland Capital Corporation (CRD 11469), Member FINRA/SIPC – an affiliate of U.S. Energy Development Corporation.