Markets may well get worse before they get better
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Carnage is the only word springing to mind when looking at the sea of red on Monday’s Asian and European market open. Equities are down — the yield of the 30-year treasury dropped below 1 percent for the first time in history. The worst affected commodity was oil: DTI temporarily undershot the $30 per barrel mark and Brent dropped a whopping 30 percent from $45.27 on Friday’s close to $31.60 in early Asian trading. This is the biggest drop in price in history for Brent. WTI has not seen a decline of this magnitude since the Gulf War. By mid-morning in Europe, Brent had recovered to $36.2 per barrel and WTI was again above $30 at $32.4 per barrel.
What unfolded in front of our eyes was the perfect storm. First the coronavirus (COVID-19) inflicted damage on supply chains leading to factories closing well beyond East Asia because they did not receive necessary parts. Airlines were particularly hard hit as travel restrictions severely limited the movement of people. On top of that, many stayed at home as a precautionary measure. Lufthansa cancelled 50 percent of its flights. Beyond China, Northern Italy is sealed off and Saudi Arabia has barred travel to and from 14 countries. Large scale events were cancelled or postponed, as prudent governments tried to minimize the risk of infection to their populations. Umrah (the lesser prilgrimage) is suspended for the time being and there are even fears that the Tokyo Olympics may have to be postponed. Many events will not take place at all or may be scaled down substantially. COVID-19 will dent economic growth. The Organization for Economic Cooperation and Development forecast a decline on global economic growth of 50 percent and the International Energy Agency says that there will be zero growth for oil demand this year — again only for the fourth time in as many years.
Events over the weekend and into Monday proved that it is important for OPEC+ countries to find a way back to the negotiating table
Cornelia Meyer
As if all of the above was not enough, the talks between the Organization of the Petroleum Exporting Countries (OPEC) and OPEC+ imploded last Friday in Vienna. OPEC’s proposal to take 1.5 million bpd out of the market above and beyond the 2.1 million bpd agreed on last December — the latter restriction to expire on March 31 — fell on deaf ears.
Russia walked away from the talks leading to full throttle production. Overnight we have moved from attempts to balance the markets to an all-out war for market share.
We were here before in 2014 and it was painful for everybody. Prices were so low that none of the producing countries could balance their budgets. International oil companies had no cash left for critical investments in future production. Many in conventional oil cheered as life became extremely hard for the shale industry. However, while suffering, shale producers used the adversity to increase productivity. In the end they came back with a vengeance.
What can we learn when beyond the doom and gloom scenarios? If anything, recent events prove that OPEC+ had done a fine job in balancing the markets since 2016. COVID-19 sent jitters through the global economy and things became extremely tense in international commodity markets. OPEC+ members had to ask themselves how much pain they were willing to take, which was a tough call.
Oddly enough the total carnage in the market may bring Russia back to the negotiating table over time. We are dealing with as many as 4 million additional barrels released into the market, if we count in the proposed additional cuts for OPEC +. If Saudi Arabia makes good on its promise to pump an additional 1 to 2 million bpd, that number comes up to 6 million bpd or about 6 percent of global consumption. All of this has to be seen against the backdrop of Libyan exports, which were reduced to zero due to internal strife, and Venezuela and Iran left out of the equation due to sanctions and a deterioration of the Venezuelan economy.
Events over the weekend and into Monday proved that it is important for OPEC+ countries to find a way back to the negotiating table. Alas, the time frame is at the discretion of the leaders.
• Cornelia Meyer is a business consultant, macro-economist and energy expert.
Twitter: @MeyerResources
