Coronavirus shockwave hits oil complex

CORONAVIRUS UPDATE

The pace of coronavirus contagion is now slowing asymptotically. But in absolute terms, [the number of new cases has only been plateauing, at around 80,000 per day globally. A numbers that is still far too large to relax.] Outbreaks have appeared in Africa, south and central America, and Eastern Europe. The relapse in Singapore is a strong warning to western governments.

So we can see the light at the end of the tunnel – but a dim light indeed. The return to a normal social life is still a long way off.
 

NEGATIVE OIL PRICE!

Bond investors have a message to oil traders: welcome to the club. Oil prices traded below zero!

The lack of storage and the total costs of stopping production, have made this possible. But the primary force is the fall of demand caused by the lockdowns. The 10% production cut decided in April was far too little.

Prices are now back to positive, but futures are below 30$ for the rest of the year. Such prices are unsustainable, and already the number of US rigs is falling. Even more efficient producers cannot live with it: the fiscal breakeven in Saudi Arabia is above $80/bbl.

So prices will have to go up – but probably not very soon. President Trump wants to use taxpayer money to support the US oil industry. This is clearly a misallocation of capital. [US producers have been gaining market shares – the US is now the single biggest producer in the world. This is ludicrous as their cost of production is higher than most. Keeping them on lifeblood would only aggravate the excesss upply, and keep prices lower for longer.]

Sadly, the low price will delay the transition towards clean energy, at a time when the agenda for climate change is already challenged by the fiscal implications of the crisis. We’re talking about a US public deficit at this year of about 20% of GDP. 
 

ECB BREAKS ANOTHER TABOO

Let me finish with the ECB, which broke yet another taboo by relaxing its eligibility criteria for collateral.

This should make sure banks have sufficient assets to post as collateral to obtain ECB liquidity. This is most welcome as we see signs of fragmentation in the inter-banking market.

This should also reduce the mechanical fallout of future rating downgrades, especially for companies losing the investment grade status. [This matters because half of the EUR IG coporate index is made of issues rated in the BBB segment. We would not be surprised if, sooner rather than later, the ECB also expands the boundaries of its Purchase Program to include Fallen Angels.]

The ECB is compromising its balance sheet more than ever before, and that speaks volume about their fears of permanent economic destruction. They’re making every effort to keep the lending channels unclogged. This is good news for creditors, at least in the near term. Unfortunately governments are not moving as fast as the ECB; not a lot of progress was made at the European Council. Unless they speed up the Recovery Fund and make it a true solidarity effort, the ECB might have to break more taboos to support the economy and the stability of the eurozone.