FINANCE | 04.23.2020
“Oil demand will remain low when normality returns”
The market swings are not over. The economic standstill caused by COVID-19, unprecedented in recent history, is affecting all sectors and intensified this week when oil prices crashed. US benchmark West Texas began trading in negative territory this week, while the European benchmark, Brent crude, hit its lowest point since 1999.
In an interview with Radio Intereconomía’s “A media sesión” program, MAPFRE Inversión’s Chief Economist Alberto Matellán explained that this behavior is caused by two factors. One is the fall in demand because of confinement, while the other is a technical issue: storage difficulties. “We don’t know what demand will be like when normality returns, but everything seems to indicate that it will be lower than before. It’s not a normal situation, but will continue as long as confinement continues,” Matellán said.
The trajectory of crude oil in both markets will have a significant effect on oil company balance sheets. In this respect, and this is true of all companies in all sectors, “the better prepared, with the strongest balance sheets, will do better, along with those that can adapt better to the new situation,” Matellán explained.
As well as affecting companies’ balance sheets, the drop in oil prices will have an obvious effect on the economy, bringing back the old ghosts of deflation. Matellán confirmed that there will be “several negative CPIs in the short-term,” but clarified that the fall in crude itself is not bad “because income is released for the consumption of other goods.” But he warned that “negative entries for any asset prices are a sign that something is wrong and this is why the fall in the oil price to those levels has such a negative connotation.”
Analysis firms and public bodies continue issuing forecasts for the Spanish economy. This week was the Banco de España, which predicts a GDP contraction of up to 13 percent under the most negative scenario. Matellán emphasized that the ranges that experts are forecasting vary widely, covering anything from a 2 percent to a 15 percent fall. This week, MAPFRE Economic Research will publish its Outlook report, which includes estimates for the Spanish and the world economies, with special emphasis on Latin America.
This economic uncertainty means “investors don’t have a scenario in mind, even though COVID-19 infection and death rates have improved. That’s why the volatility of the last few weeks will continue,” Matellán adds. He therefore continues to recommend caution, especially for small savers who, in his opinion, have an advantage. “They invest with five- to ten-year horizons, a strategy appropriate to their risk profile. In other words, they have a scenario in mind, and that strategy remains valid even in uncertain times such as these.”