Alphavalue | One might wonder why equity investors bet on being long on oil last week when the Brent was reaching new lows. In fact on Tuesday, Brent prices hit 20-year lows in the $22/barrel range. It could be one of the surprising examples of how much risk can be taken when there is talk about, or hopes for, stimulus. At that point, even the strongest fundamentals tend to be ignored.
Looking at the following chart, the oil sector seems to be ready for a further correction.
Since Saudi Arabia defied the markets at Russia’s expense, US shale oil, the compass for the black gold markets, has not had a clear direction. But just two weeks ago, no one had any idea what a global confinement policy would mean for the energy markets. For the time being, a 25% drop in oil demand seems to be the result. At the beginning of the coronavirus pandemic, the question mark was over China (24% of oil and gas demand) and now it is over Europe (15% of oil and gas demand), the United States (16%) and not forgetting India (6%).
As the market mood has shifted from a V-shaped to a U-shaped recovery, the question is how fast the demand for fossil fuels will recover. Not to mention discovering the benefits of reduced pollution which may pressure governments to increase taxes on fossil fuels to give green energy a chance. In short, the situation after the coronavirus will not be easy for fossil fuel suppliers.