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Goldman says pandemic will permanently alter oil markets

A picture taken on March 26, 2020 shows a car driving on a road next to the King Abdullah Financial City in the Saudi capital Riyadh, after the Kingdom began implementing a nationwide 11 a.m. curfew on the day of an emergency G20 videoconference, to discuss a response to the COVID-19 crisis. (Photo by FAYEZ NURELDINE/AFP) (Photo by FAYEZ NURELDINE/AFP via Getty Images)

MAKE NURELDINE | AFP via Getty Images

The coronavirus pandemic is likely to be a game-changer for energy markets, analysts say. Goldman Sachswith carbon-based industries such as oil seen as “in the crosshairs”.

A global health crisis has forced countries around the world to shut down, with many governments imposing massive restrictions on the daily lives of hundreds of millions of people.

To date, around 730,000 people have contracted COVID-19 worldwide, with 34,686 deaths, according to data compiled by Johns Hopkins University.

It has left many wondering when life might return to normal, amid heightened fears that a coronavirus lockdown could last for months.

“With social distancing measures now affecting 92% of global GDP, the ultimate extent of these shutdowns which is still unknown will likely permanently alter the energy industry and its geopolitics, restrict demand as the economic activity will normalize and shift the debate around climate change,” Goldman analysts said in a research note released Monday.

“Not only is this the greatest economic shock of our lifetime, but carbon-based industries like oil are in the crosshairs because they have historically served as the cornerstone of social interactions and globalization, the prevention of which is the key. primary defense against the virus,” they added.

Oil prices fell sharply on Monday morning as the outbreak continues to crush global demand for crude.

International benchmark Brent was trading at $22.68 a barrel, down more than 9%, while US West Texas Intermediate (WTI) was trading at $20.01, nearly 7% lower. .

Brent futures fell to an 18-year low and the WTI briefing fell below $20 a barrel on Monday, before both benchmarks pared some of their losses.

Goldman Sachs analysts said they believe the economic impact of the coronavirus outbreak will be “extremely negative” on oil prices, given that it is “impossible to shut down a large amount of demand without ramifications. important and persistent on supply”.

“The only thing that separates energy from other commodities is that it must be contained within its production infrastructure, which for oil includes pipelines, ships, terminals, storage facilities, refineries and networks. distribution. All have a relatively small and limited reserve capacity.”

Can the United States and OPEC save this market?

Led by Jeff Currie, global head of commodities research at Goldman Sachs, the US investment bank said oil had been “disproportionately affected” by the coronavirus outbreak.

True, the bank said demand for crude this week is expected to fall by 26 million barrels per day (bpd), or 25% of total demand growth. The expected drop in demand for oil was so severe, Goldman argued, that the ongoing price war between Saudi Arabia, OPEC kingpin, and Russia, which is not the leader of the OPEC, had become “irrelevant”.

Saudi Energy Minister Prince Abdulaziz bin Salman Al-Saud and Russian Energy Minister Alexander Novak at the start of an OPEC and NON-OPEC meeting in Vienna, Austria, December 6, 2019 .

Leonhard Foeger | Reuters

Earlier this month, oil producer group OPEC and its allied partners, sometimes referred to as OPEC+, failed to agree on extending production cuts beyond March 31.

This has raised fears of a surge in supply from April 1, with Saudi Arabia and the United Arab Emirates both pledging to increase production.

“Now the question is, can the US and OPEC save this market?” asked Goldman analysts.

“The demand shock has become so large that they cannot do it alone, a fact they have acknowledged, stating that a balanced market would require a coordinated reduction in global production – a policy that seems impossible at this stage, too late to stop the current surplus and well below other initiatives on the agenda at the moment.”

What does all this mean for the climate crisis?

Along with other analysts at the bank, Currie said the current oil crisis would see the energy sector “finally achieve the much-needed restructuring”.

“We’ve long argued that it’s the supply and demand for capital that matters, not the supply and demand for barrels; as long as there’s capital, companies can weather tough times and barrels come back. still.”

Furthermore, the debate on climate change “almost certainly will take a different course when the global economy emerges from it and is faced with the prospect of having to invest on a large scale in carbon-based industries”.

“The silver lining of the coronavirus crisis is that the virtual shutdown of key carbon industries – autos, airlines and cruise ships – is likely to send carbon emissions plummeting this year, with initial data from China indicating a fall. around 20%+ during the peak of the close,” Goldman analysts said.

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