Yves here. Oil prices have reversed some of their Monday rout. Investors are also trying to take comfort from that, Xi visiting Wuhan, and Trump’s plan to cut payroll taxes. For instance, from the Financial Times:
The fading sense of panic on Tuesday prompted investors to sell havens, which have rallied furiously in recent weeks. The 10-year US Treasury yield jumped 15 basis points (0.15 percentage points) to 0.6475 per cent, after having dived below the 0.5 per cent threshold for the first time on Monday. The 30-year Treasury yield rose 13 bps to back above 1 per cent. Bond prices fall as yields rise.
Those moves followed a promise by President Donald Trump of a “major” economic relief package to reduce the negative impact from the Covid-19 outbreak, including a possible payroll tax cut.
Brent crude, the international oil benchmark, rebounded 5 per cent to $36 a barrel on Tuesday, while the US marker West Texas Intermediate rose to $33. In Monday’s rout, oil plunged by a quarter in its sharpest one-day drop since the 1991 Gulf war.
In China, the CSI 300 stock index closed 2.1 per cent higher after President Xi Jinping made his first visit to Wuhan, the city at the centre of the country’s outbreak, in a signal that the Communist party believed it had brought the epidemic under control.
In the mean time, Kyle Bass thinks thing will get cheaper…but he’s been wrong on Japan, so take him with a fistful of salt. But his commentary on oil is consistent with the post below.
However, and he’s not the first I’ve heard say this, but Bass takes this oddly cheery outlook for the US (and by implication the rest of the world) that the coronavirus outbreak won’t produce as bad outcomes as 2008 because the banking sector isn’t implicated. He then proceeds to describe how exposed the European, Chinese, and Hong Kong banking systems are. He seems to see the US strictly in terms of the impact on exposed sectors, and isn’t considering that a return of the virus in the fall-winter, and the resulting loss of income to hourly workers as a result of lockdowns and widespread self-quarantines, would produce a tremendous downdraft that will pull all sorts of other activities down (home sales and repair, visits to doctors and dentists, reduced use of professional services….).
By Nick Cunningham, an independent journalist, covering oil and gas, energy and environmental policy, and international politics based in Portland, Oregon. Originally published at OilPrice
It’s one for the history books.
Oil opened on Monday down roughly 25 percent, the sharpest decline in decades, and broader financial markets fell so precipitously that the circuit breakers put in place during times of volatility tripped, temporarily halting trading.
The list of adjectives available to describe what is happening to the oil market is not adequate. There are now multiple crises unfolding at the same time.
First, there is obviously a health crisis – the coronavirus continues to spread. Large swathes of northern Italy are now on lockdown. The number of cases in the U.S. has surged, and could explode in the coming days. Mandatory lockdowns may not be far off. The Trump administration is asleep at the wheel, actively trying to play down the extent of the crisis.
Second, there is a brewing economic crisis. China shut down parts of its economy in January and February. Parts of Europe followed. The U.S. is next.
The Dow Jones has fallen by more than 16 percent in the past week, and markets have quickly shifted from concern to full blown panic.
Third, if all of that is not enough, OPEC and Russia just added on an oil supply crisis. The collapse of talks last week and the ensuing price war has WTI down to $33 per barrel as of midday on Monday, down from $45 last Thursday on the eve of the OPEC+ talks. OPEC and Russia have said that all restraints on production expire at the end of the month, and everyone can produce at will. Oil could easily be in the $20s at any moment (and might be by the time this piece is published).
For the U.S. oil industry, this is a historic crisis. It has the ingredients to be far worse than the 2008 financial meltdown. At that time, a sharp contraction in the global economy blew a hole in the market. But OPEC responded by cutting production.
This time, that same potential for an economic calamity is present, but there is an oil price war occurring simultaneously.
With a combination of a massive supply overhang and a significant demand shock at the same time, the situation we are witnessing today seems to have no equal in oil market history.#THREAD
— Fatih Birol (@IEABirol) March 9, 2020
A decade ago, the shale industry barely existed, and falling oil prices cushioned the blow to the U.S. economy by making energy cheaper. Today, an oil market bust could pretty quickly plunge Texas, North Dakota and Appalachia, among other places, into a recession.
Analysts are now predicting that the Eurozone, at a minimum, is heading for an economic recession. France’s finance minister Bruno Le Maire said that Europe needs a “call to arms” to defend the economy.
The pain for U.S. drillers was immediately visible when markets opened on Monday. Deep losses hit everyone. “We have taken the unprecedented steps of bringing our full coverage group to Hold or Sell,” Neal Dingmann of SunTrust said, according to Bloomberg. He called it “energy Armageddon.”
“Not one company in our coverage can keep production flat for more than a few months while spending within cash flow at $35 WTI,” Charles Meade of Johnson Rice & Co. said, according to Bloomberg.
“The U.S. shale sector is getting completely killed. A complete bloodbath. Billions of dollars in equity wiped out.”
“The U.S. is going to be the collateral damage here. The producers here are going to be suffering so much,” Amrita Sen, chief oil analyst at Energy Aspects, told Bloomberg from Houston. “They were already suffering and there’s no lending. There’s no money right now for them. This is really going to crush them.”
On Monday, Diamondback Energy said that it would “immediately” slash capex and cut back on completion crews and rigs.
Shale drillers were already facing substantial hurdles with cash flow problems and maturing debt. “We are preparing for two years of low prices and will make the necessary adjustments to maintain our great balance sheet,” Pioneer Natural Resources’ CEO Scott Sheffield told the Washington Post. Pioneer’s share price cratered by 32 percent on Monday.
“There will be many bankruptcies in our industries and tens of thousands of layoffs over the next 12 months,” Sheffield added.
Shale stocks tanked on Monday, with big names in shale such as EOG Resources, Whiting, Continental Resources and Apache all down over 30%. But one of the biggest losers was Occidental Petroleum, which has seen its market capitalization shrink to $15 billion. It paid $38 billion for Anadarko, and shares are off roughly 73% since that deal.