In fact, the price correction is borderline comical, per Courvalin’s calculations.
“The lack of discretionary buying activity in the face of an uncertain new COVID variant has therefore left prices in free-fall and pricing in a dire demand outlook. We estimate based on our pricing model, that the market has now priced in a mammoth c.7 mb/d [millions of barrels per day] negative demand hit over the next three months, with no offsetting OPEC+ response,” pointed out Courvalin in a new research note on Wednesday.
Courvalin added, “To put this into context, this would represent any of these extreme outcomes: (1) not a single plane flying around the world for three months, or (2) half as intense as the 2Q20 global lockdown, or (3) a world even worst-off than before vaccinations: the combination of global jet demand falling to last winter’s level (-1 mb/d), a twice as large hit to EU demand as the Alpha variant last winter (-2 mb/d) and twice as large a hit to Chinese demand as the Delta variant this summer (-1 mb/d). The relatively parallel nature of the sell-off, with back-end prices down $7/bbl, could also be interpreted as the market pricing in a shallower but longer demand hit: a c.4 mb/d hit over 3 months with c.3mb/d of this a permanent impact offset by higher OPEC+ spare capacity.”
WTI crude oil prices have plunged 12% since Nov. 24 on worries the new variant will stunt global demand. As Yahoo Finance’s Jared Blikre notes, oil prices are now down about 23% from their recent high.
Shares of oil majors Exxon and BP have shed 7.2% and 9.8%, respectively, in the last five sessions, according to Yahoo Finance Plus data.
The sell-off in oil comes amid a violent broader market pullback this past week, which continued on Tuesday.
The Dow Jones Industrial Average plunged 652 points in Tuesday trading, while the Nasdaq Composite and S&P 500 were also deeply in the red. All 30 Dow components were in the red for the session, except for Apple and Merck.
Courvalin believes the steep pullback in oil prices is looking overdone.
“We view the move lower in prices as excessive but understandable in the context of low year-end liquidity and risk appetite. Given the large uncertainties at this time, we await further news on the variant’s development and additional restrictions imposed before refreshing our supply and demand balances and oil price forecasts, although again reiterate our view that the market has far overshot the likely impact of the latest variant on oil demand with the structural repricing higher due to the dramatic change in the oil supply reaction function still ahead of us,” Courvalin noted.