As energy experts come to grips with the 'black swan' coronavirus and plunging oil, 4 of them share their outlook for the struggling industry - and assess the economic fallout
- In reports to clients and interviews with Business Insider, energy analysts and other industry experts are warning the impact of ultra-low oil - now trading around $20 per barrel - will ripple across the wider economy.
- While the positive impact of lower oil prices for consumers outweighs the negative impact thrust onto corporations, the hit to companies and their employees tends to be more sudden, one analyst told us.
- With little sign oil prices could rise meaningfully in the near-term, the BlackRock Investment Institute said in a Monday report that it was avoiding energy investments during a "lower-for-longer" oil environment.
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The price of oil is sitting near its lowest level in nearly two decades as the novel coronavirus disrupts both supply and demand for the resource. It's a sudden development that's threatening to upend the global economy.
For both West Texas Intermediate and Brent crude oil, prices have swung wildly this month as oil-rich Russia and Saudi Arabia have engaged in a price war. Global demand has also waned amid the coronavirus outbreak.
Credit agencies are now cutting their ratings on energy companies, many of which are heavily indebted. Demand for travel and transportation like airlines has ground to a near-halt, delivering another blow to firms that rely on selling oil. A barrel of WTI crude on Monday traded around $23.20, the lowest level in about 18 years and down roughly 60% in one year.
The impact of low oil prices now extends well beyond the energy sector alone. In reports to clients and interviews with Business Insider, analysts and other energy industry insiders say the impact of ultra-low oil prices will ripple across the wider economy at a particularly vulnerable moment.
Who benefits from lower oil prices? It's complicated.
Like other shifts that play out across supply chains and different corners of the economy - including interest-rate cuts and hikes - the impact of falling oil prices is complex. After all, the shock of oil price spikes, too, can also be detrimental for firms and consumers.
Ultra-low-priced oil's positive impact on consumers ultimately outweighs the negative impacts to corporations, said Michael Hsueh, a foreign-exchange strategist covering energy commodities at Deutsche Bank.
Still, the hit to companies is usually more sudden. And while the savings that end up in consumers' pockets grows, it's less clear how and when that savings is spent, Hsueh told Business Insider by phone.
"But on balance, it should still be a positive," he said.
For the second and third quarter of this year, Hsueh's price estimates for WTI and Brent crude oil are $22 and $25, respectively. As prices languish around these multi-year levels, the oil industry will cut back on investments as low prices eat away at budgets, he said.
And for integrated oil giants, the headwinds are already on full display. Exxon said last week that it would explore "significantly" reducing spending as a result of conditions spurred by the COVID-19 spread and drop in commodity prices. S&P Global Ratings lowered Exxon's credit rating to AA from AA+, Forbes previously reported.
"Companies in the space will go out of business," Bill Baruch, the founder and president of Blue Line Futures, a Chicago-based futures and commodities brokerage, told Business Insider, referring to oil and gas firms broadly. "They are now in survival mode; we are seeing spending and rig activity quickly cut back."
Baruch called the novel coronavirus, also known as COVID-19, a "total black swan," referring to rare, severe events investors did not see coming - or factor into their investment theses.
Where investor expectations for the oil market stand - and how they're positioning
The price of oil can also reflect longer-term expectations for economies' growth, since oil is essential to businesses' operations across industries. The US is the largest oil-producing nation in the world, according to Nomura research.
As the coronavirus has spread around the world and led to store closures, travel bans, and job losses, the International Monetary Fund on Monday said it expects the pandemic to spark a severe recession that will subside next year.
Investors are adjusting their playbooks accordingly. With little sign oil prices could rise meaningfully in the near-term, the BlackRock Investment Institute said in a Monday report that "we avoid energy" high-yield investments during a lower-for-longer oil pricing environment.
By the same token, the report's authors said it's maintaining an overweight position in Asian fixed-income investments given "low energy exposure."
Some firms expect little meaningful change in prices this year. Goldman Sachs' three-month forecast for WTI crude is $20, with a six-month forecast of $28. By this time next year, it expects a $41 barrel of WTI.
The severe recent declines have even pushed one analyst, Paul Sankey at Mizuho, to call for the possibility that oil prices could go negative in a move that would suggest producers would pay buyers to take on barrels of oil.
Bank of America, meanwhile, said in a note on Monday that it favors buying crude oil "on dips," though noted the recent oil price shock "can have more permanent effects, as it has hurt the balance sheet of oil exporters significantly."
For investors looking for a hiding spot, companies squarely in the midstream sector - or those involved in transporting and storing oil and other commodities, like natural gas - are typically less exposed to price fluctations.
Still, they are not immune. In a note to clients on Friday, the UBS analyst Shneur Gershuni said one chief takeaway from his recent calls with management at midstream companies he covers was capital expenditures ("capex") are going to fall.
Gershuni got the sense that most management teams are "taking a strong look at capex plans to see what can be deferred," and expects more announcements from companies around lowering projections.
Get the latest Oil WTI price here.