According to a number of cognitive scientists, mankind uses its unique ability to reason primarily for justifying pre-held convictions, rather than for forming convictions.
One of the most famous cognitive biases is confirmation bias. As we prefer to be proven correct, we naturally incline towards information that confirms our views and try to ignore or reason away information that does not.
Now that the world is battling another unprecedented crisis in the Korona-virus, the biggest risk for energy strategists is to fall prey to cognitive biases, in which case their forecasts would be about what they would like to see happen, rather than about what is likely to happen.
First reports of the Corona-virus came from China. The first person known to have fallen ill due to the virus was in Wuhan, on 1 December 2019. By the end of that month, the Chinese government realized it was dealing with an epidemic.
On 23 January 2020, it implemented its first measures to bring the epidemic under control, which was a quarantine of the affected area.
Ever since additional steps have been taken to fight the virus, such as prohibiting large public gatherings, closing schools and universities, and severely restricting travel.
Rather than the virus, it is the measures to contain it that are having a massive impact on global oil demand. As people are forced to stay at home, economic activity essentially comes to a halt.
A decline in demand for goods and services, and limitations on the ability of companies to meet the remaining demand for goods and services, affects almost all sectors of the economy.
Specifically for crude oil, as demand for transportation-related refined fuels – gasoline, diesel, jet – craters, refineries slowdown or shutdown, which affects crude oil demand. In the case of China, the impact of the slowdown caused by the measures to combat the Corona-virus has been estimated to be in the 25% to 50% range.
Since it took China approximately 3 months to bring the virus under control, Best Case Scenario assumes other countries as well will require 3 months.
As far as Europe is concerned, it appears to lag China by about 2 months. In most European countries the first cases were reported end-February / early-March, and the containment measures that affect economic activity are currently being ramped up.
In the Best-Case Scenario, therefore, Europe should suffer a 25% to 50% drop in economic activity during March, April, and possibly May. The return to normal would begin end-May, early-June.
The United States is behind Europe, in terms of confirmed cases, numbers of tests performed, and also the implementation of virus containment measures.
What this means is that in the Best-Case Scenario, the worst is yet to come for global crude oil demand.
The price of crude oil would continue to go down for at least another 2 to 3 months. $20 or even $10 per barrel is a real possibility.
What the fourth quarter would look like for the crude oil price depends on the outcome of the current Supply War between (primarily) Saudi Arabia and Russia, and the impact of the lower price environment on US Shale production.
The biggest cash-saving measure, however, should come from a reduction in dividend payments and share buy-back programs.
Russia Insider / ABC Flash Point News 2020.