World markets slump as recession fears eclipse stimulus

The US and Britain are spearheading a multibillion-dollar international fightback against economic havoc unleashed by the coronavirus. (AFP)
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Updated 19 March 2020

World markets slump as recession fears eclipse stimulus

  • World oil prices spiraled lower on energy demand woes

LONDON: Global stock and oil markets plunged on Wednesday, as vast stimulus measures failed to offset heightened concerns that the worsening coronavirus outbreak will tip the world into a deep downturn, dealers said.

In European stock market trading, Frankfurt, London and Paris tanked around 5 percent in morning deals, after similar dizzying losses across Asia.

Before the market open in Paris, French regulators banned for one-month short-selling, or the betting that markets will fall — extending an initial one-day halt, in an effort to curb steep losses.

World oil prices spiraled lower on energy demand woes, with New York’s West Texas Intermediate crude touching a 17-year low at $25.08 per barrel.

The dollar, meanwhile, rose across the aboard, including versus the Japanese yen which is seen as a haven investment in times of economic turbulence.

The US and Britain are spearheading a multibillion-dollar international fightback against economic havoc unleashed by the coronavirus, as the EU shuts its borders to travelers from outside for 30 days.

Yet most market commentators agree that the virus-wracked world economy will likely plunge into recession — which means a minimum of two successive quarters of economic contraction.

“From what we see from the markets’ reaction, massive monetary and fiscal measures deployed are not thought to be enough to prevent economies from plunging into recession,” Swissquote Bank analyst Ipek Ozkardeskaya told AFP.

“Every business and household is expecting governments to replace the coronavirus-led losses, which is simply not possible.

“Hence, there is already a massive shock in activity and demand, which almost guarantees a worldwide recession regardless of the measures taken by central banks and governments,” Ozkardeskaya added. 

Washington led the charge on Tuesday, with Treasury Secretary Steven Mnuchin saying officials were drawing up a package that could surpass $1 trillion, on top of $300 billion in deferred tax payments, making it among the largest federal emergency plans ever and surpassing assistance during the 2008 global financial crisis.

The measures would include cash payments to struggling families, with Mnuchin warning the pandemic could drive US unemployment to 20 percent, a Republican Senate source told CNN.

“We don’t want people losing jobs and having no money to live,” US President Donald Trump said at a White House press conference, adding that the package “is a substantial number. We are going big.”

British Finance Chief Rishi Sunak has, meanwhile, unveiled an “unprecedented package” of government loans worth £330 billion ($400 billion), while France and Spain announced tens of billions of euros in aid.

And with global airlines reeling, Italy has moved to re-nationalize the bankrupt former national carrier Alitalia, while France signaled it would not hesitate to take key firms into state control to protect them.

The moves followed central bank interest rate cuts and pledges to make cash available to stop financial markets from jamming up.

“While all of these (stimulus) numbers appear impressive on the surface, the uncertain nature of how the virus will play out in the coming weeks means that the final bill could well be much higher,” said CMC Markets analyst Michael Hewson.

In Asian trading, Tokyo ended down 1.7 percent, while Sydney plunged more than six percent and Hong Kong lost more than four percent, while Shanghai was 1.8 percent off.


Coronavirus crisis gives oil exporters a crash course in energy transition

Updated 2 min ago

Coronavirus crisis gives oil exporters a crash course in energy transition

  • Daniel Yergin’s new book shows how oil is adjusting to a world radically altered by the coronavirus pandemic
  • He says oil producers faces many different challenges as they navigate the great energy transition

The historic deal by OPEC+, led by Saudi Arabia and Russia but brokered by the US, had resulted on the largest supply cut in the history of the oil industry. But the worst was yet to come as market turmoil reached fever pitch, resulting in “Black Monday” in April, when oil drillers paid consumers to take barrels away. Pulitzer prize-winning author Daniel Yergin, in the exclusive final excerpt from his latest book “The New Map — Energy, Climate, and the Clash of Nations,” takes up the story — and warns of the challenges ahead for oil producers in the great energy transition.

The agreement had signaled a new international order for petroleum, one shaped not by OPEC and non-OPEC, but by the US, Saudi Arabia and Russia. In the future, markets would shift; it would be a different planet again after the coronavirus; politics and prices and personalities would change over the months and years ahead. But the sheer scale of their resources, and the dramatically changed position of the US, guaranteed that these three countries, one way or the other, would have dominant roles in shaping the new oil order.

The deal was indeed historic, but it turned out to be not enough, not when measured against the ever-deepening collapse in demand — 27 million barrels down in April, more than a quarter of total world demand. After the deal, prices slid into the high teens and, in some places where oil could not be stored or transported, a lot lower. The world was now running out of storage.

Owing to an anomaly in the way the futures market worked, the price dropped to one cent and then, on April 20 — Black Monday — went “negative.” That meant that a financial investor selling a futures contract, who would be obligated to take physical delivery of oil for which they had no storage place, had on that day to actually pay a buyer to take the oil. That, too, was historic — the lowest price ever recorded for a barrel of oil — minus $37.63.

But that was not a price in the oil field, but a one-time fluke in financial markets, an aberration in a futures contract.

Meanwhile, the global calamity continued. On May 1, coronavirus cases in the world exceeded 3.2 million, with more than 1 million in the US, where more than 25 million people had lost their jobs over five weeks.

The IMF, which at the beginning of the year had predicted solid global growth of 3.4 percent, announced that the world had already entered the worst recession since the Great Depression. 

May 1 was also the day that the mega-oil deal, the OPEC+ agreement, went into effect; and Saudi Arabia and Russia and the other producers began to sharply reduce production. At the same time, the brute force of economics was forcing companies to curtail output or shut down wells altogether.

May 1 was the day that the mega-oil deal, the OPEC+ agreement, went into effect; with Saudi Arabia and Russia and the other producers sharply reducing their production. (Shutterstock)

Why sell oil for less than it cost to produce — assuming you could find a buyer or storage — when you could, in effect, store it in the ground — allow the oil to “shelter in place” — and wait for prices to recover?

The biggest market-driven curtailments by far were in the US, followed by Canada. In May the global combination of OPEC+ cuts and market curtailments took 13 million barrels per day of crude oil off the world market.

The planned spending by the larger US oil upstream companies was slashed in half, meaning many fewer wells would be drilled in the months to follow, ensuring that US production would slide significantly over the next year. The US would certainly remain one of the Big Three, but not as big. 

By the beginning of June, the number of coronavirus cases worldwide was over 6 million, more than double what it had been a month earlier. Yet the economic darkness was beginning to lift.

*****

READ PART 1: How the coronavirus crisis forced the largest oil supply cut in history

*****

China, the first country to lock down, was the first to unlock, and it was mostly back in business. European countries were at different levels of increased activity, and the US was opening up in stages, albeit with considerable variation among states. With economies coming back, oil demand was increasing.

Consumption in China was almost back to pre-crisis levels, and the streets in Beijing and Shanghai and Chongqing were once again gridlocked as people who had the option chose to drive rather than take public transportation.

Gasoline consumption in the US, which had fallen by half at the beginning of April, was now growing again. All this pulled oil prices back up higher — to levels that not so long ago would have been considered a low-price scenario, but now a relief. 

With prices rising, would OPEC+ stay together and the cut-backs hold? Key would be the restored relationship between Saudi Arabia and Russia. But also of importance would be how quickly.

US producers, who had shut down their wells, would turn around and open them again, which could renew the oversupply and deliver another blow to prices, as could low economic growth or a persisting recession — or a resurgent virus. 

A gas station attendant refills a car at a station in the Saudi capital Riyadh on May 11, 2020. (AFP/File Photo)

And there were many perspectives on what lay ahead. Looking beyond the crisis, some thought that market cycles were over and that, even with economic recovery, oil prices would be low for a long time.

Others thought otherwise — more likely that the slashing of investment in new production would lead, with renewed economic growth, to a tightening in the balance between supply and demand that would send prices higher.

And some thought entirely differently. They sought a “green recovery:” Governments taking advantage of the crisis to reorient their energy mix away from oil and gas and hasten what they saw as the coming energy transition.

What do the changing world energy markets mean for oil-exporting countries? Markets will go in cycles.

They always have, and oil exporters will face volatility, although what happened in 2020 was never anticipated. They may well have to live with periods of lower revenues, which will mean austerity and lower economic growth, with greater risk of turmoil and political instability.

This emphasizes the need for these countries to address their over-reliance on oil.

Opinion

This section contains relevant reference points, placed in (Opinion field)

The overweening scale of the domestic oil business crowds out entrepreneurship and other sectors in many oil-exporting countries; it can promote rent-seeking and corruption. It also overvalues the exchange rate, hurting non-oil businesses.

In the future, even with a rebound in prices, countries will need to manage oil revenues more prudently, with an eye on the longer term. That means more restrained budgeting and building up a sovereign wealth fund, which can invest outside the country and develop non-oil streams of revenues, helping to diversify the economy and hedge against lower oil and gas prices. 

Petroleum-exporting countries will also find themselves competing with other exporting countries for new investment by companies that will be cost-conscious, selective and focused on “capital discipline.” That will push countries to shape scale and regulatory regimes that are competitive, attractive, stable, predictable and transparent.

Experience proves how hard it is to diversify away from over-dependence. It requires a wide range of changes — in laws and regulations for small-and medium-sized companies, in the educational system, in access to investment capital, in labor markets, in the society’s values and culture.

These are not changes that can be accomplished in a short time. In the meantime, the flow of oil revenues creates a powerful countercurrent that favors the status quo.

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Extracted from “The New Map: Energy, Climate and the Clash of Nations” by Daniel Yergin (Allen Lane). Copyright Daniel Yergin 2020.