Goldman on how the 'largest economic shock of our lifetimes' will permanently alter energy markets

The coronavirus pandemic will likely be a “game-changer” for energy markets, according to analysts at Goldman Sachs, with carbon-based industries such as oil thought to be sitting “in the cross-hairs.”

A global health crisis has meant countries around the world have effectively had to shut down, with many governments placing 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 several months.

“With social distancing measures now impacting 92% of global GDP, the ultimate magnitude of these shut-ins which is still unknown will likely permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalizes and shift the debate around climate change,” analysts at Goldman said in a research note published Monday.

“Not only is this the largest economic shock of our lifetimes, but carbon-based industries like oil sit in the cross-hairs as they have historically served as the cornerstone of social interactions and globalization, the prevention of which are the main defense against the virus,” they added.

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

International benchmark Brent crude traded at $22.68 a barrel, down more than 9%, while U.S. West Texas Intermediate (WTI) stood at $20.01, almost 7% lower.

Brent futures fell to their lowest level in 18 years and WTI briefing dipped below $20 a barrel on Monday, before both benchmarks pared some of their losses.

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

“The one 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 distribution networks. All of which have relatively small and limited spare capacity.”

Led by Jeff Currie, Goldman Sachs’ global head of commodities research, the U.S. investment bank said oil had been “disproportionately hit” by the coronavirus outbreak.

To be sure, the bank said crude demand this week was estimated to fall by 26 million barrels per day (b/d), or 25% of total demand growth. The expected drop in oil demand was so severe, Goldman argued, that the ongoing price war between OPEC kingpin Saudi Arabia and non-OPEC leader Russia had been made “irrelevant.”

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.

It has led to concerns of a supply surge from April 1, with Saudi Arabia and the United Arab Emirates both pledging to ramp up production.

“Now the question is: can the U.S. and OPEC save this market?” analysts at Goldman asked.

“The demand shock has become so large that they can’t do it alone, a fact they have acknowledged, stating that a balanced market would require a coordinated global production cut — a policy which appears impossible at this point, too late to stop the current surplus and far below other initiatives on the agenda right now.”

Alongside other analysts at the bank, Currie said the current oil crisis would see the energy industry “finally achieve the restructuring it so badly needs.”

“We have long argued that it is the supply and demand of capital that matters, not the supply and demand of barrels; as long as there is capital, companies can withstand difficult periods and the barrels always come back.”

Separately, the climate change debate “will almost certainly take a different course when the global economy emerges from this and is faced with the prospect of having to make large-scale investments into carbon-based industries.”

“The silver lining of the coronacrisis is that the virtual shutdown of key carbon industries — autos, airlines and cruise ships — is likely to cause carbon emissions to fall this year, with initial data from China pointing to a circa 20%+ fall during the peak of the shutdown,” analysts at Goldman said.