When analysts land at their desks on Monday, they’re going to be keeping an eye on oil prices after Friday’s market meltdown.
Laura Lau, senior portfolio manager at Brompton Funds in Toronto, is “cautiously optimistic," but she and other analysts are far from certain about where the price of oil will swing this week or how markets will react as the coronavirus continues to spread around the globe.
Oil markets in particular are at the mercy of the virus, which is causing widespread travel warnings and bans, and significantly decreasing demand for gasoline and jet fuel. By the end of Friday, oil prices – which had been making a slow recovery after a dramatic hit mid-February – had taken another tumble.
The benchmark for U.S. crude oil fell 16 per cent during the week, settling Friday at $44.76 a barrel. Brent crude, the international standard, dropped 14 per cent for the week to its lowest levels since July, 2017, closing Friday at $50.52 a barrel. On the TSX, the energy sector dropped 0.7 per cent as oil prices plummeted amid fears of slowing economic growth.
Meanwhile, shares of Exxon Mobil tumbled to $49.82 on Thursday, reaching a 15-year low, before rebounding more than 3 per cent on Friday. Chevron Corp. shares hit their lowest level in nearly four years on Friday. In Canada, both Suncor and Canadian Natural Resources fell Friday, to close at their lowest levels year to date.
“Without being a genius, I can tell you there will be more cases and more countries [with coronavirus cases] but the question is how much?” Ms. Lau said Friday.
Ms. Lau’s cautious optimism comes from a slight reversal in the markets Friday, and the OPEC crude production cuts she expects to see later this week.
Jeremy McCrea, director of energy research at Raymond James, said investors are concerned about the amount of oil being added to global inventories as demand for crude continues to slide.
Like Ms. Lau, he said OPEC discussions, set for Thursday in Vienna, will be a “big driver” of oil prices as markets emerge from what he called a “shell-shocked” end last week.
For both Mr. McCrea and Ms. Lau, the overarching theme in the oil markets is uncertainty around the coronavirus – how much it will spread and to which countries, and the number of fatalities and international quarantines.
“By far the biggest thing in the markets here is the unknown,” Mr. McCrea said Friday.
“You’re seeing uncertainty drive oil prices and investors saying, ‘I just don’t want to be part of this risk.’”
Ms. Lau said that’s compounded by the amount of automated selling in the markets. Unlike past health emergencies such as SARS and H1N1, she said, more indexed funds and less active management means there are fewer human eyes to catch wild swings.
“The market does tend to overreact, especially when you have a lot of machines involved in indiscriminate selling,” she said.
“A lot of them use price signals. They all have different gains, but a lot of them … end up being quite similar so it tends to make it worse fairly quickly.”
Ultimately, no one knows what will happen to oil prices this week.
“It would be naive for anybody to think they could predict where oil prices will go,” Mr. McCrea said, adding that expert opinions are swinging wildly.
“At the end of the day, it all comes out as noise and confusion and uncertainty, and what investors do with uncertainty is say, ‘I’m just going to sell.’”
That, he said, is why stocks have moved so much.
“You just haven’t seen any buyers step in. Sellers are ruling the day here.”
With reports from the Associated Press
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.