What happened:
Yesterday the number affected by the coronavirus surpassed 1 million and fatalities neared 50,000 globally.
US jobless numbers jumped by a record 6.6 million, bringing the total of US workers filing for unemployment in the past two weeks of March to nearly 10 million. In France 4 million applied for unemployment and 800,000 are out of a job in Spain. Unemployment in Italy stands at 10 percent and Germany’s at 5 percent, with the latter keeping people employed via its short working scheme. Spain’s services PMI has come down to 23 and France’s, Italy’s and the UK’s are at 29, 17.4 and 34.5 respectively. These are grim numbers.
Oil markets went topsy-turvy when President Trump tweeted that he had spoken to Russia’s Vladimir Putin and Saudi Crown Prince Mohammed bin Salman to ask them to end their war for market share. He intimated the two had had a conversation that he expected could lead to production cuts by OPEC+ of between 10-15 million bpd, which temporarily sent oil markets skyrocketing by 48 percent and ended the day 21 percent up, closing the day at 29.91. While KSA is on record to favor an emergency meeting of OPEC +, Putin denied the phone conversation between him and the crown prince. Oil markets rose again slightly in line with expectations of an emergency meeting of OPEC+ on Monday, April 6.
Why it happened:
The jobless numbers and services PMIs are evidence of the dismal state of the economy in the US and Europe. According to the president of Cleveland’s Federal Reserve Bank, Loretta Mester, US unemployment could hit 15 percent. Vice President Mike Pence went on the record with his expectation of a rapid economic recovery once the US emerges on the other side of the coronavirus crisis. How much of this is wishful thinking in an election year will depend on how effective the various stimulus packages will be in terms of keeping companies afloat and people employed.
The forced shutdown of most OECD economies has had a devastating effect on oil demand. The question is how deep production cuts would need to be to have a sustainable impact on the supply demand balance. This is as difficult to predict as it is to gauge by how much demand has declined. Current estimates range between 20 and 25 million b/d, which is probably on the low side. In the meantime, the world is running out of storage space for both crude and product. Goldman Sachs estimates 250,000 b/d to go into storage. Others put that number as high as 1 million b/d. Texas Railroad Commissioner Ryan Sitton told Bloomberg that he expected the Permian Basin to run out of storage capacity by early June. He is the regulator for the Texan oil space and must look with trepidation at what the low oil price does to the highly levered shale community, which operates at high production costs.
Where we go from here:
All eyes are now on the OPEC+ meeting expected for next Monday. Saudi Arabia is clear that it does not want to bear the whole burden of production cuts. OPEC+ would like to widen the circle beyond OPEC+ including Brazil, Mexico Norway and the US. OPEC Secretary General Mohammed Barkindo had started to reach out to Sitton about two weeks ago. In expectation of the OPEC+ meeting, Brent stood at 32.62 by Friday lunchtime in Europe.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairman and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources
