The ebook “The Black Swan” was written by former Wall Street dealer Nassim Nicholas Taleb to explain uncommon, outlier occasions that may’t be predicted beforehand, however which have probably enormous penalties.
The phrase “black swan” has been used to explain any variety of monetary occasions, such because the 1987 inventory market crash, and the 2008 monetary meltdown within the housing market.
The factor to recollect about black swans is that by their very nature, you by no means know when they’re going to pop up. Although the oil markets have been hit by virus-induced demand fears previously, such occasions are black swans.
Currently, the unfold of coronavirus in China — the world’s largest oil client — is a black swan that has the oil markets reeling. Oil fundamentals seemed honest a month in the past, however now all bets are off. Oil costs have shed almost 20% in 4 weeks, but it surely’s laborious to say the place the underside could also be with coronavirus circumstances nonetheless rising.
Citigroup analysts have urged that the virus might cut back oil demand by 1 million barrels a day (BPD), however that is nonetheless clearly a creating state of affairs.
As oil costs fell in January, OPEC was extensively anticipated to debate extra manufacturing cuts at its March assembly. However, within the face of essentially the most vital demand destruction the world has seen in additional than a decade, the cartel tried (and failed) to get an settlement with Russia on deeper manufacturing cuts.
Jay Park, the CEO of oil firm ReconAfrica, emailed me his ideas on the last word impacts, which he believes are largely already priced in:
– “We anticipate to see a drop in refined gas demand markets out of China in a matter of days or even weeks. 1 / 4 of 1,000,000 barrels will seemingly be the last word affect, which, all issues thought-about, needs to be modest. There are 5 elements that have an effect on oil pricing provide, demand, OPEC, geopolitics, and sentiment. Regarding the coronavirus, this appears to be a difficulty largely associated to sentiment. Demand considerations and OPEC can compound this case, and it’s one thing we’re monitoring, however any motion proper now’s being pushed largely by concern. For perspective, we’re previous conditions, just like the SARS outbreak in 2003, which confirmed us that the affect from the outbreak was small on demand general, however the decline in worth was vital.
– We see the affect of the virus on worth might be a few drop of $5-$10 a barrel in Brent and WTI. I see the coronavirus affect as already priced in, as we now have seen WTI go from $63 to $53 and Brent from $68 to $59 this month. There are different bearish elements additionally at work, resembling new manufacturing in Guyana, the notion of some weak point in demand general within the world economic system, and a seasonal discount in demand that usually happens this time of 12 months. Add the coronavirus, and that turns into one other difficulty we now have to be looking out for. But let’s additionally keep in mind that related illness-related worth declines have had an affect for a restricted interval of 2-6 months.”
Meanwhile, one among my January predictions was that the worth of West Texas Intermediate (WTI) wouldn’t shut under $50/bbl this 12 months. I felt fairly good about that prediction a month in the past — earlier than anybody had died from coronavirus — however that prediction goes to fall as fears of Chinese demand destruction develop.
p.p1 p.p2 p.p3 p.p4 p.p5 p.p6 p.p7…