Latest sell-off has seen $9 trillion in global equity value vaporised in nine days, while the average 10-year yield in the developed world hit 16 basis points, the lowest in 120 years.
It feels 2014 all over again. Or 2008.
The OPEC+ meeting broke up without a deal on Friday, sending oil prices into a freefall. Brent was down by about 9 percent during midday trading, rapidly heading to the low-$40s. Oil prices could test the 2016 lows before all is said and done.
Russia has resisted cutting production deeper. On Thursday, on the eve of the final day of talks, OPEC more or less issued an ultimatum. They proposed 1.5 million barrels per day (mb/d) of additional production cuts, and suggested that OPEC would not cut alone without Russia’s participation. “There will be no deal” without Russia, Iran’s oil minister said.
Moscow called their bluff. On Friday, everyone walked away and there was no deal. As of midday on Friday, WTI plunged to $42 and Brent fell to $46, down 9 percent, the lowest level in nearly three years. The entire OPEC+ arrangement is now in doubt.
Even worse for oil prices, the existing production cuts, agreed to only a few months ago, expires at the end of the month. As it stands, members of the OPEC+ coalition could conceivably raise output beginning in April, exacerbating the global glut.
But Russia’s resistance rested on some reasonable logic. Global demand is contracting by the largest amount in history — a worse demand shock than what occurred even during the global financial crisis.
It’s not clear that this can be fixed by supply cuts. A demand-side problem has to be met with a demand-side response — via lower prices. Or, put another way: let the market sort it all out. As a result, oil prices nose dived on Friday.
It may not be the end of the story. OPEC+ members said that consultations will continue, but negotiators need time to cool down, according to Iran’s oil minister.
There are echoes of the 2014 OPEC meeting, when then Saudi oil minister Ali al-Naimi preferred to let the market fix the growing supply/demand imbalance. That led to a steep drop in oil prices, a downturn that did not turn a corner until 18 months later. The plunge in prices ground U.S. shale supply growth to a halt.
This time could be much worse. Not only is the oil market facing a disaster, but this time it’s a demand-led crisis. The global economy is facing real questions about a recession, and the coronavirus continues to spread. The airline industry, for instance, could lose more than $100 billion. The worse may yet lie ahead. In that sense, the analog could be more 2008 than 2016.
It is the most severe decline since Q4 2008, the height of the 2008–2009 global economic crisis, which saw demand tumble by 2.8 million b/d year-on-year. The demand might be contracting by 2.7 mb/d in the first quarter. If the impact the coronavirus has had on global oil demand is sustained, then by the second half of the year we’d expect to see weaker GDP. This will have a far greater impact on oil demand than just temporary reductions in jet fuel and gasoline demand.
For U.S. shale, a disaster lies ahead. The industry has been largely unprofitable to date, but had received several rounds of huge injections of capital in the last decade, most recently following the 2016 downturn. But by last year, investors had begun to sour on unprofitable shale drilling. Energy stocks collapsed and access to capital became increasingly scarce.
That was all true before the coronavirus and before the failed OPEC+ meeting. Now, U.S. shale will likely find itself in a state of true crisis.
Unlike a few years ago, recapitalization in any meaningful way is off the table. Capital markets have turned off the spigot. Also, the twice-a-year credit redetermination period is getting underway, and the most recent slide in prices will likely mean an immediate cut to credit lines from lenders.
Worse, the wave of debt taken out during the 2014–2016 downturn is about to come due. North American oil and gas companies have more than $200 billion in debt maturing over the next four years, with $40 billion due this year.
Peak shale may have finally arrived.
There is a very likely US intervention as was done earlier when Mr Bush prodded Saudi on prices in 2008.
The fallout in OPEC production cut has led the freefall of markets today worldwide with Saudi Arabia and Russia taking tough stands in a brutal fight for a grab on the market share.
We see this as a renewed war on shale dominance that is making conventional oil companies less competitive and hence Russia is ready to bear the brunt to a USD 30 barrel world.
Brent crude futures fell by as much as $14.25, or 31.5 percent, to $31.02 a barrel. That was the biggest percentage drop since January 17, 1991, at the start of the first Gulf War and the lowest price since February 12, 2016. It was trading at $35.75 at 01:14 GMT.
Japan’s yen, seen by many investors as a safe-haven asset in times of economic weakness, surged against emerging market currencies with exposure to oil, including the Russian rouble and Mexican peso, as analysts saw danger ahead.
Today’s price action puts at risk the fiscal health of the vast majority of sovereign producers and budget cuts and increased debt loads are now looming in the event of a prolonged period of low prices.
For the most politically and economically fragile producer states, the reckoning could be severe.
There were also worries that United States oil producers that had issued a lot of debt would be forced into bankruptcy by the price drop.
Energy stocks took a beating, with E-Mini futures for the S&P 500 already down 4.7 percent. Japan’s Nikkei fell 4.4 percent and Australia’s commodity-heavy market 5 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan lost 1.2 percent.
The scale of the collapse shows that any hopes of a temporary respite were in vain. The notion that overweight equities is the only real option in a world of super-low rates now seems to be from ‘The Time Before’.
US officials have barely moved beyond platitudes about ‘strong fundamentals’ so there is surely plenty more room for markets to price in major damage to the US economy.
The number of people infected with the coronavirus rose above 107,000 across the world as the outbreak reached more countries and caused more economic carnage.
Italy’s markets are sure to come under fire after the government ordered a lockdown of large parts of the north of the country, including the financial capital Milan.
After a week when the stockpiling of bonds, credit protection and toilet paper became a thing, let’s hope we start to see some more clarity on the reaction.
Dollar bloc central banks cut policy rates by 125 basis points, not as a way to stop a viral pandemic, but to stem a fear pandemic, many had little scope to ease further.
Bond bubble
Investors are widely expecting at least a half-percentage-point rate cut from the US Federal Reserve at its scheduled policy meeting on March 18 following last week’s emergency easing and a move towards zero not long after.
The European Central Bank meets on Thursday and will be under intense pressure to act, but rates there are already deeply negative.
The onus is falling, perhaps inevitably on the actions of governments to abandon budget surpluses and reinvigorate the demand side of the economy.
Urgent action is clearly needed with data suggesting the global economy slid into recession this quarter. Figures out from China over the weekend showed exports fell 17.2 percent in January-February, from a year earlier.
The clearest outcome of the exogenous COVID-19 shock is a collapse in bond yields, which once panic fades can induce huge rotation to ‘growth stocks’ and ‘bond proxies’ in equities.
Yields on 10-year US Treasuries plunged to a once-unthinkable 0.51 percent, having halved in just eight sessions.
Yields on the 30-year long bond dived 35 basis points on Friday alone, the largest daily drop since the 1987 crash, and were last down further at 1.13 percent.
The tumble in yields and Federal Reserve rate expectations have pulled the rug out from under the US dollar, sending it crashing to the largest weekly loss in four years.
The US dollar extended its slide in early Asia to reach 103.55 yen, depths not seen since late 2016, while the euro shot to the highest in more than eight months at $1.1387.
Gold jumped 1.6 percent to clear $1,700 per ounce to reach a fresh seven-year peak.