The coronavirus is a 'black swan' for oil and energy markets, says Ned Davis Research

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The outbreak of the coronavirus is a “true black swan” for the oil and energy market, and as crude prices continue to move lower the worst may not be over yet, Ned David Research said in a note to clients Monday.

Analyst Warren Pies noted that the outbreak has reduced Chinese demand for oil by 2 million to 3 million barrels per day, which means “the oil market is looking down the barrel at no demand growth for the calendar year, and outright demand contraction is now on the table.”

At the end of January the firm downgraded its outlook on oil from bullish to neutral, and Pies said that his best guess is that “crude oil and energy equities will see more weakness before this is over.”

That said, he was quick to note that attempting to draw comparisons between the 2003 SARS outbreak, or attempting to forecast the spread of the disease are “fools errands,” arguing that investors should instead should rely on “objective indicators.”

On Monday U.S. West Texas Intermediate crude fell to its lowest level in 13 months as traders continue to worry that a global economic slowdown caused by the coronavirus will weigh on demand.

Medical team members of the Second Hospital of Shangdong University prepare to leave for Hubei Province in Jinan, capital of east China’s Shandong Province, Feb. 9, 2020.

Zhu Zheng | Xinhua | Getty Images

Both WTI and international benchmark Brent crude are coming off a fifth straight week of losses, and both are currently trading in bear market territory.

Pies noted that in prior times of broad weakness in the energy sector refiners were sometimes a pocket of strength. But this time around that might not be true since this is a demand-driven decline, rather than the supply-driven declines of recent years.

But looking ahead, he said there could be a buying opportunity in midstream companies down the line.

“With natural gas prices sub-$2, WTI below $50, and spring borrowing base redeterminations looming, we expect more E&P weakness to bleed into the midstream group. However, this perfect storm could create an excellent opportunity to gain exposure to this group later in the year.”

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