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It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

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THE DAILY EDGE: 19 MARCH 2020

(…) Depending on how well the country carries out social-distancing measures, testing, and containment, we could be looking at a high end of almost two million cases by the end of March. A more conservative estimate places the US at around 228,000 cases, and a very optimistic estimate would be near 18,600 cases. (…)

Under the high-risk scenario, we may expect that around 10% of COVID-19 cases require hospitalisation, equalling almost 200,000 cases that need hospital-level care at the same time, which is significantly more than US capacity. However, GlobalData does not expect the high-risk scenario to be very likely, especially if containment measures continue to escalate. As the US ramps up testing over the next few weeks, we may initially see a significant increase in cases. Improvement to testing is crucial to contain the epidemic as it allows identification of those who were infected and can thus be isolated in a timely manner.

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  • China’s Virus Epicenter Sees No New Cases

China still faces another concern as imported cases continue to add to the country’s tally of infections. The National Health Commission reported 34 new cases for March 18, all of them patients who brought the disease from other countries.

  • BETTER LATE THAN NEVER

A chilling new study forced the United Kingdom to sit up and take coronavirus seriously, and the White House task force is also reportedly using it to guide strategy. The study predicts that if we only try to slow the spread, the number of hospital beds could be overwhelmed, leading to about 250,000 deaths in the U.K. and more than a million in the United States. The study, by London’s Imperial College COVID-19 Response Team, recommended stronger measures would need to be taken to reduce the death toll further.

In a rare pre-recorded televised message, Chancellor Angela Merkel said Germany is facing its gravest challenge since World War II. “Take it seriously,” she said. “Since German reunification, not since World War II, there’s not been a challenge to our country that depends as much on our united actions done in solidarity.” (Axios)

Bank of Canada asks retailers to stop refusing cash payments over virus fears
Biggest Factory Shutdown Since World War II Hits U.S., Europe The synchronized shutdown is unlike any seen since the 1940s, historians say.
Americans Losing Work as Businesses Cut Back Over Virus Employers are cutting shifts, suspending work and starting to lay off workers as the new coronavirus devastates business across the country

Treasury Secretary Steven Mnuchin told lawmakers that the unemployment rate could spike to almost 20 percent (from its current level of 3.5 percent), people familiar with his comments told The Washington Post.

Detroit Car Makers to Temporarily Close U.S. Plants Over Virus Concerns The Detroit car companies have agreed to temporarily shut down factories in the U.S. to protect workers against the rapidly spreading coronavirus.
Consumers Face a Massive Credit Crunch. Lenders Are Still Figuring Out What To Do. Out-of-work customers could miss loan payments and suffer plunging credit scores. Lenders and credit-reporting firms are being asked to help.
Coronavirus Hits State and City Budgets States and cities across the U.S. are scrambling to quickly draw millions of dollars from their reserves to help cover coronavirus-related expenses such as testing and unemployment insurance, while also bracing for steep tax-revenue declines.
The Economic Rout Accelerates The Fed and Treasury need to liquify business now or liquidate later.

You know you have a big economic problem when you roll out your grand solution and markets tank another 6%. That was the sorry story Wednesday, as the Trump Treasury disclosed its $1 trillion proposal to rescue the pandemic economy, and the panic accelerated.

The rout in stocks was the least of it. Oil fell 17% to about $20 a barrel, which is lower than it’s been since after 9/11. Financial markets also showed more stress, as asset holders liquidated holdings even in supposedly safe havens like Treasurys and gold. Money managers are shedding those traditional hedges against risk because they fear even those are too risky to hold. They’re literally selling those for cash to stick in the vault, if not a mattress. (…)

The market has figured out that American commerce is shutting down right before our eyes with no end in sight. (…) second quarter GDP could fall by 10% or more. For comparison, the worst single quarter during the financial panic was minus-8.4% at the end of 2008. Mass layoffs could begin soon in the hardest hit parts of the economy, spreading and growing if there’s no sign of recovery. (…)

The Fed is deploying its 2008 tools to ease constraints in money markets, and that’s useful for the economy’s financial plumbing and banks. The commercial paper facility is good for the biggest companies. But this doesn’t address the dramatic and immediate need for liquidity—financing, i.e., loans—across the breadth of American business to survive this unprecedented economic shutdown.

President Trump’s Treasury seems to think this can be solved by handing out $500 billion in cash to individual Americans in two installments in April and May. Chuck Schumer and Nancy Pelosi will see and raise. This won’t stimulate much of anything, but it might even be tolerable as a political price if it helped to sell the proper medicine for the larger economy.

Secretary Steven Mnuchin’s proposal that he sent to Senate Republicans includes $50 billion for the airlines, plus another $150 billion in loans to other affected businesses. This is too little, too cumbersome, and too political. Wait until Congress attaches strings to that cash, and wait until the bureaucrats get around to doling it out. The airlines may get rescued, perhaps with price and route controls attached, but they won’t have many passengers if a million Americans a month lose their jobs.

The same goes for another $300 billion for a new small-business loan program to be administered through private lenders, though it isn’t clear what rules would apply or how long this would take to set up. If it’s anything like the Small Business Administration, prepare for a long wait. (…)

You don’t calm a panic by floating ill-considered trial balloons or chanting “go big” as an illusion of proper and thoughtful action. Markets are panicked in part because they sense that our political leaders are more panicked than the public is.

(…) The government needs to act to prevent the liquidity panic from becoming a solvency rout that becomes a banking crisis. And it needs to act fast.

Mr. Mnuchin should adapt his pet plans and work with Mr. Powell to set up a new facility under Section 13(3) of the Federal Reserve Act to provide financing to otherwise healthy businesses jeopardized by the pandemic shutdown against good collateral. (…) Mr. Mnuchin and President Trump should also ask Congress to backstop this facility, in case there are losses, with that $150 billion Treasury has proposed for industry-specific rescues. The Fed should be able to set it up in a week.

This pandemic may be the biggest demand shock to the U.S. economy since World War II. The only alternative we see to this liquidity solution is if the pandemic eases faster than we think, or policy makers make a different calculation about viral versus economic risks. If we don’t do the latter, we need to do the former or suffer the economic damage.

(…) One of the best ways to restore faith in the economy when the public-health emergency abates would be to ensure that it coincides with the largest public investment in infrastructure in generations. (…)

If Congress passes a major infrastructure and clean-energy bill before the April recess, shovels can start hitting the ground when workers, businesses and investors are looking for signs of hope, indications of growth, and reasons to believe that the worst has passed. And while it can take years to complete a project, the act of investment — and putting people to work — sends exactly the kind of signal to the marketplace that our country will need. (…)

Light bulb Canada could be announcing a limited-time holiday on its 5% national sales tax to incite people to spend earlier than later. Provinces could do the same, providing an even greater incentive to spend now.

There is no federal sales tax in the U.S. but the federal gov. could finance states doing it.

Credit Is the Scariest Market to Watch, Not the Dow or S&P
ECB Announces New €750 Billion Bond-Buying Program
Federal Reserve to Backstop Money-Market Mutual Funds The Federal Reserve said Wednesday it would launch a new lending facility to backstop the money-market mutual-fund sector as part of a broadening effort to calm turmoil sparked by the novel coronavirus epidemic.
Banks Have Nowhere to Hide in the Coronavirus Crisis European bank stocks are back at levels last seen in the 1980s as investors struggle to size up the impact of the economic shutdown

A problem for airlines is a problem for banks. A problem for oil producers is a problem for banks. A problem for restaurants is a problem for banks.

Sitting at the heart of the economy, banks are spared no pain. They are usually protected by the diversity of their lending—only one or two industries or regions struggle at a given time—but the widespread economic shutdown to contain the novel coronavirus is a crisis for nearly everyone, everywhere. (…)

Lenders are much stronger now than a decade ago. Since the 2008 financial meltdown they have built up substantial capital under acute regulatory scrutiny. Yet many are still wondering if the buffers will be big enough.

The root problem is that the scale of the coming default wave is impossible to assess. Even under normal circumstances only a bank truly knows its loan book. (…)

Interest rate cuts may help a few borrowers and delay defaults in the immediate crisis, but longer term they make life harder for lenders struggling to generate profits. Governments’ apparent willingness to backstop loans and unleash fiscal policy is more welcome. (…)

China to ramp up spending to revive economy, could cut growth target

The ramped-up spending will aim to spur infrastructure investment, backed by as much as 2.8 trillion yuan ($394 billion) of local government special bonds, said the sources. The national budget deficit ratio could rise to record levels, they added. (…)

Higher spending could push the 2020 budget deficit ratio to as high as 3.5% – up from last year’s 2.8%, the sources said. (…)

PANDENOMICS

Fedex March 17 conf. call:

FedEx flew 246 flights in and out of China just last week, which is aligned with our normal flight schedule and over the past couple of weeks, our flights have been full, and we have registered record load factors intra-Asia, especially with our hub in Guangzhou. (CEO)

FDX stressed
that China continues to recover as manufacturing output (led by large manufactures) has
recovered back to 65-75% utilization and despite a ~40% decline in air cargo capacity (due to
a decrease in widebody belly capacity), FDX has seen week-over-week rebound in air demand
to and from China since March 3. Importantly, while clearly encouraging, FDX also noted that
the COVID-19 demand shock to Europe/N.A. remains unknown, as initial European factories
are beginning to shut. (Raymond James)

Goldman Sachs’ China Consumer Activity tracker takes the average year-over-year change in traffic congestion, movie box-office revenue, daily property sales, and passenger load factors on domestic flights. Its US consumer activity tracker includes hotel occupancy, movie box-office receipts, Broadway box-office receipts, Redbook retail sales, college basketball attendance, and commercial airline available seat miles. Because the considered consumer activities are likely highly affected by the coronavirus, the measures likely overstate the declines in overall activity.

2. Our Coronavirus Consumer Activity Trackers Show a Modest Improvement in China, but a Significant Decline in the US. Data available on request.

Meanwhile…

US oil companies race to restructure debt Advisers report surge in activity as price war threatens bankruptcies across shale patch
Oil War, Virus Plight Force $13.3 Billion in Saudi Spending Cuts

(…) It was targeting a fiscal deficit of 6.4% of gross domestic product this year under the assumption that Brent would average about $65 per barrel. It needs oil at almost $84 to balance this year’s budget. (…)

Saudi Arabia would run a budget deficit of 23% of GDP if Brent falls to $20, while its current-account shortfall would reach 15.6% of economic output, or $122 billion, JPMorgan Chase & Co. analysts estimate.

“Such a situation would imply a very fast rate of depletion” of Saudi foreign-currency reserves, JPMorgan analysts including Nicolaie Alexandru-Chidesciuc said in a report. “It would also be associated with a rapid increase in debt/GDP and would thus create serious financial stability issues. Consequently, the kingdom may not sustain the price war for very long.” (…)

The kingdom is consulting with other Group of 20 countries about a potential summit next week in an attempt to unify efforts to slow the pandemic. Saudi Arabia is the G-20’s host nation this year.

Pointing up Saudi Aramco Will Find It Increasingly Hard to Serve Two Masters With the steep drop in oil, the company’s role as a main source of government funding will likely put pressure on its obligation to shareholders as a public company.

(…) This is an inflection point for Aramco and Saudi Arabia. The kingdom receives more than 60% of its revenue from the oil industry, and while it has options to help meet its budget — debt, austerity, or new taxes — it is truly reliant on Aramco payments. The government receives funds from Aramco mostly in three ways: a 50% income tax, a royalty on barrels of oil produced and a dividend. With low profit expected in 2020, the cash transferred to the government for the income tax will be limited. With low oil prices, the royalty payments, which are 15% of the price of Brent, will be exceedingly low. And if the company upholds its commitment to public shareholders, there would be less profit left to pay a dividend to the government.

In 2019, net income for Aramco was $88.2 billion, down $22.9 billion from the year before. With Brent now trading significantly below its price at the start of this year, Aramco is looking at lower profits just like every other oil producer. (…)

Pointing up Lower profit isn’t the only bad news for the Saudi government. If Brent averages $35 per barrel, the government only receives $5.25 in royalties for each new barrel produced. Even if Aramco averages production of 12 million barrels per day — a major increase from earlier this year — the government would only earn $23 billion in royalties from crude oil. Comparatively, in 2018, Aramco paid the kingdom almost $55.6 billion in royalties and excise taxes. Unless prices rise, the royalty shortfall will be significant. (…)

Pointing up Aramco committed to provide public shareholders with their share of a minimum of $75 billion in dividends, starting in 2020. The government, the largest shareholder, isn’t supposed to receive any ordinary dividends until after non-government shareholders are awarded their portion, based on a $75 billion total payout. However, with a lower profit expected in 2020, there may not be enough profit to cover the entire public shareholder dividend. On top of that, the Saudi government may need some sort of special dividend to fund itself.

Free cash flow fell to $78.3 billion in 2019 from $85.8 billion the year before. If Aramco’s board, at the direction of the monarchy, provides a special dividend to the government, it could be pulling money from Aramco’s cash reserves. This would decrease the value of the company’s shares and hurt the Saudi population, 20% of whom bought into the IPO, often on leverage. It would also hamper any plans for another offering of company shares to raise further capital for the government. (…)

If Aramco’s board of directors fails to provide the $75 billion dividend to all public shareholders, and, worse yet, if it funds the government at the expense of the company, it will mean that the monarchy has proclaimed Aramco to be a tool for its power and not public firm at all. And, because it is listed solely on the Saudi exchange, there will be no recourse for any shareholders, except for the loss of faith in the company and a stigma on its shares.

Sure seems MBS is not great at chess…

Fingers crossed We will likely get a cure before a vaccine.

WHO and Roche launch trials of potential virus treatments Worldwide efforts intensify to find drug that counters deadly disease

China’s Science and Technology Ministry official Zhang Xinmin has said that Japan-based Fujifilm’s anti-flu drug Favipiravir helped Covid-19 patients recover.

Developed by Fujifilm Toyama Chemical, and also referred to as Avigan, Favipiravir gained approval in Japan in 2014. In 2016, Japan provided Favipiravir as emergency aid for the Ebola virus outbreak in Guinea, noted Reuters. (…)

In Shenzhen city in China, a clinical trial involving 80 participants demonstrated better chest improvement in those treated with Favipiravir, noted Zhang. Also, patients treated with the drug tested negative for the genomic trace of the virus in lesser time, compared to those not administered with the drug. The drug was able to shorten the recovery time from 11 days to four days for mild and regular cases. Another trial in Wuhan showed that the drug shortened fever duration from an average of 4.2 days to 2.5 days.

Zhang said that Favipiravir has been effective, without any obvious side-effects, in helping coronavirus patients recover.

At today’s pre-op of 2358:

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THE DAILY EDGE: 18 MARCH 2020: Zombies Meet Black Swan

“IT’S BAD”! It will get worse…

Coronavirus Case Count The virus has reached all 50 U.S. states, sickened thousands and reached more than 100 countries

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Daily Increases in Number of Reported Coronavirus Cases

(…) South Africa, which had its first case 10 days ago, now has 61. According to Ramaphosa, the virus has begun spreading inside the country. And just yesterday, Rwanda, Equatorial Guinea, and Namibia all reported their first cases, bringing the number of affected countries to 23. Some scientists believe COVID-19 is circulating silently in other countries as well. (…)

Behind the Stimulus Frenzy: the Prospect of Billions of Unpaid Bills Washington is grappling with an increasingly urgent problem along with the novel coronavirus pandemic: the growing risk that millions of businesses and households won’t be able to pay their everyday bills

(…) “Americans need cash now, and the president wants to give cash now. And I mean now, in the next two weeks,” Treasury Secretary Steven Mnuchin said at a White House briefing, highlighting the urgency of the dilemma. Privately with lawmakers, however, he said checks might not be available until the end of April. (…)

Nearly four in 10 Americans don’t have the savings in hand to cover an unexpected, $400 expense with cash, according to Fed surveys.

Fed data show nonfinancial businesses had $1.53 in liquid assets like cash and securities on hand for every $1 in short-term liabilities in the fourth quarter. That is down from $1.80 when Lehman Brothers collapsed in 2008, but up from $1.34 during the September 11, 2001, terrorist attacks, according to Moody’s Analytics. The more liquid assets they hold, the better positioned they are to handle a cash crunch. (…)

The Fiscal Stimulus Panic $1,000 checks won’t help the economy, but a new Fed backstop will.

We will survive the coronavirus panic as Americans adapt, as they always do. We’re less confident of the Washington panic, as our politicians rush to throw money around without much thought or economic logic as they almost always do. At least the Federal Reserve stepped in Tuesday to address an immediate economic problem.

To take these one at a time, President Trump appeared to throw his support Tuesday for the Mitt Romney-Steven Mnuchin idea of giving every American a check for $1,000. This will help those who lose their jobs or income from government shutting down retail and other operations. But Congress is also addressing this with expanded jobless insurance, food-stamp and other income transfers, and mandated sick leave that is much better targeted at genuine hardship. Some people who will get the $1,000 won’t need it.

The politicians are again selling the Keynesian illusion that this is the best way to get cash into the pocket of consumers who will spend it. That claim has failed time and again—from the George W. Bush tax rebate of 2002, to the Nancy Pelosi-Bush rebate of 2008, to the Barack Obama-Pelosi spending spree of 2009. The cash outlay will be even less effective now with so many fewer ways to spend it as much of the economy shuts down.

The checks no doubt will be popular, which probably explains GOP support in the Senate and White House. They will also blunt Democratic criticism if businesses also receive aid. But the checks won’t come cheap, running at a cost of hundreds of billions of dollars for the first round. What happens if the pandemic lasts into summer? The clamor will be for another round, and then another.

The U.S. can borrow now at low rates to finance this, but even American resources aren’t infinite. A $2 trillion annual deficit implies a substantial future tax increase—maybe as soon as next year—that would retard the recovery. Americans should get a greater economic return for that amount of money.

Mr. Trump has also agreed to the request of U.S. airlines for a $50 billion rescue. At least this appears to be structured in the Treasury request as secured loans, rather than grants. Solvent companies need financing to get through the virus economic shutdown, and once healthy they should be able to pay it back.

One problem with industry-specific rescues is that the requests turn into political free-for-alls on Capitol Hill. The better way to do this is a new Fed facility we wrote about Tuesday that would allow all business comers that were solvent before the virus to apply for loans against good collateral. Mr. Mnuchin should lean on Fed Chairman Jerome Powell to do it. (…)

By Narayana Kocherlakota, professor of economics at the University of Rochester. He was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

(…) I see this drag lasting well into next year. This recent analysis from a team of researchers in the U.K. suggests that, until a vaccine is developed, governments will have to choose between two unpalatable options:

— exponential growth in the number of Covid-19 patients, which will crush health-care systems in a matter of weeks

— or stringent social-distancing policies to keep disease transmission under control (…)

Responding to this kind of protracted slowdown will require a bigger stimulus than the 6% of gross domestic product proposed by the administration. Instead, policy makers should be planning for two years in which, in the absence of a fiscal intervention, the output gap will be significantly negative — possibly as much as 6% of GDP, or on the same scale as the recession caused by the 2008-09 financial crisis. It’s going to take a much larger fiscal infusion to make up for that shortfall — something more on the order of $2.5 trillion rather than $1.2 trillion. (…)

First, the government should pay $10,000 to every adult and child younger than 40. They are more likely to go out and spend this money, partly because Covid-19 presents much less of a health risk to them. Second, the government should pay a bonus to each person who gets tested for the coronavirus (as long as they haven’t been tested in the prior week). Finally, as was done in the Great Recession, the government should both increase and extend unemployment-insurance benefits beyond the normal 26 weeks.

We know there is going to be a downturn and, unfortunately, there are good reasons to believe that it will be both long and deep. The Federal Reserve has done what it can using monetary policy. Now we need a strong and well-designed fiscal policy response from the U.S. government.

We are clearly in a “whatever it takes” situation. This is a cashflow crisis that needs to be addressed right away. The sooner, the better and, with politicians and partisanship, seven months before the elections, the simpler the better.

AIRLINES IN FREEFALL

A $50B rescue for airlines. Yes, we need to keep them flying, but make them, and many others, pay for their careless management:

And these guys’ totally scandalous behavior, prioritizing $ before lives, with the FAA’s help!

(…) The U.S. planemaker has told lawmakers it needs significant government support to meet liquidity needs and it cannot raise that in current market conditions, the people said.

Boeing confirmed Monday it was in talks with the administration about short-term support, while U.S. President Donald Trump said Tuesday the U.S. government would provide support. Boeing has noted that typically 70% of its revenue flows to its 17,000 suppliers and has told lawmakers that without significant assistance the entire U.S. aviation manufacturing sector could collapse. (…)

Boeing confirmed on Tuesday that it had completed the drawdown of the rest of a $13.8 billion line of credit it had secured last month.

Boeing’s total debt nearly doubled to $27.3 billion in 2019, as it compensated airlines and grappled with additional production costs for the 737 MAX even as the grounding prevented it from delivering the aircraft to buyers.

Reuters on Tuesday reported Airbus has about 16 billion euros ($17.60 billion) in cash and needs some 5.5 billion euros a month, a person familiar with Monday’s discussions said. (…)

China lacks appetite to save world economy, analysts warn Beijing adopts more conservative approach in tackling latest crisis compared with 2009

(…) China’s total debt load amounts to about 310 per cent of GDP, one of the highest levels among emerging markets, according to the International Institute of Finance. (…)

ECB Seeks to Mend Rifts as Economic Clouds Gather For the second time in a week, the European Central Bank scrambled to clarify remarks from one of its top officials that suggested it is unlikely to do more to support the region’s struggling economy.

The move highlights divisions among top ECB officials that could hurt efforts to overcome a fast-moving global crisis whose epicenter has shifted to Europe.

In a statement early Wednesday, the ECB said its 25 rate-setting officials were united in their commitment to step up stimulus policies if needed to combat the spreading coronavirus. (…)

But so far, they are still openly quarreling about what’s needed and how to do it…

Source: @financialtimes; Read full article
Ottawa to unveil nearly $30-billion economic aid package for struggling Canadians, businesses
Fed to Relaunch Primary Dealer Credit Facility Crisis-era facility allows large financial institutions access to short-term loans

The Primary Dealer Credit Facility, originally established in 2008, will seek to tamp down strains in funding markets by expanding loans to the 24 large financial institutions. Known as primary dealers, they function as the Fed’s exclusive counterparties when trading in financial markets.

The program will essentially function as an overnight loan facility for primary dealers, similar to how the Fed’s discount window provides a round-the-clock backup source of funding to banks.

The facility will offer terms as generous as those made available in late 2008. (…) Earlier Tuesday, the central bank said it would establish a facility to make loans to U.S. corporations in an effort to ease dysfunction in the $1.1 trillion market for short-term corporate IOUs called commercial paper. (…)

During the depths of the 2008 financial crisis, companies served by U.S. banks bolstered themselves by drawing about 30% of their available credit, with some sectors going much further. If five industries now getting hammered by the coronavirus and oil-price slump were to, say, draw as much as 70%, all corporate clients together would extract a total of about $700 billion from the six biggest banks’ liquidity pools. That’s close to 16% of lenders’ cash-like holdings at the end of last year. (…)

A team at Goldman Sachs Group Inc. concluded last week that a 100% drawdown in several embattled sectors would bring seven of the biggest banks to the brink of breaching their regulatory minimums for liquidity ratios.

“If other industries begin to see larger draws, this will put further pressure” on the ratios, the Goldman analysts led by Richard Ramsden wrote in a March 12 report. The analysis excluded Goldman. (…)

Regulators are considering changes to leverage limits and accounting rules to free up bank capital, according to people familiar with the talks. The Fed on Sunday urged banks to use their excess capital to expand lending. That evening, eight of the nation’s largest banks promised to suspend share buybacks, stockpiling capital for loans. (…)

Surging U.S. Dollar Is Next Big Headache for World Economy Emerging markets are especially vulnerable as they try to cope with collapsing currencies and plunging demand.
Saudis to Hike Oil Export to Record 10 Million Barrels a Day

Saudi Arabia plans to boost oil exports even further from April to May, reaching a record of more than 10 million barrels a day as the kingdom taps a new field.

The increase in shipments of about 250,000 barrels a day shows the kingdom is determined to carry on with its policy of pumping flat out after its alliance with Russia collapsed. (…)

Before the price war broke out, Saudi oil exports averaged just under 7 million barrels a day from December to February, according to tanker-tracking data. (…)

(…) what started as a price war may turn out to be a much more important strategic rethinking of Saudi oil production policy, as the kingdom seeks to monetize its giant petroleum reserves as fast as possible rather than shepherding that store of wealth through the generations. Such a shift would fundamentally change the economics of the industry, using Saudi Arabia’s ultralow cost advantages to win a race to the bottom. For Prince Abdulaziz’ younger half-brother, Crown Prince Mohammed bin Salman, it would represent a massive gamble: the world’s preeminent oil exporter choosing to live with lower long-term oil prices. (…)

Riyadh has kept mum on its motivations, but if the suspicions of many in the oil market prove true, this oil war will be a Darwinian survival of the fittest. As the world steps up the fight against climate change, the demand for oil will peak in a few decades. Saudi Arabia and Russia will likely emerge bruised but standing. Many others, including U.S. shale producers, will be in dire straits.

In the kingdom, the current thinking is to let free markets work. If officials are worried about low oil prices, they aren’t showing it. Saudi Arabia is hunkering down for one to two years of cheap oil, adjusting government spending and drafting measures to protect the vulnerable among its citizenry. “We are very comfortable with $30,” Khalid Al-Dabbagh, finance director of state-owned Saudi Arabian Oil Co., told investors on March 16, an opinion widely repeated in the ministries and royal palaces in Riyadh. “In a nutshell, Saudi Aramco can sustain very low oil prices and can sustain it for a long time, and that is especially the case compared to others in the sector.” (…)

The shock waves are still being felt. By the estimate of some traders and consultants, global oil demand is in free fall, down about 10% from the previous year—the largest drop ever. (…)

Unknown to anyone but a few royals and senior officials in Riyadh, the kingdom had been preparing precisely for that moment for several weeks. For the Saudis, Novak’s pump-at-will comment was a green light to ramp up the country’s own production. (…)

Russian President Vladimir Putin used the last few years to build a war chest of petrodollar reserves. At $577 billion, the cash pot is up 60% since 2015. Over the same period, Saudi petrodollar savings have declined 28%, to $502 billion. Moreover, Russia benefits from a floating exchange rate, which absorbs part of the blow of low oil prices. Perhaps more important, Russian society has already endured a few tough years of U.S. sanctions: It can absorb more pain.

So far, the tactics aren’t prompting the Russians to seek talks. The Kremlin has said it isn’t surprised by the fall in prices and doesn’t see a need to meet with OPEC. That’s partly because the price war is giving Moscow something it wanted: It’s prompting U.S. shale companies to announce big spending cuts. Rather than wait and see, as U.S. shale executives did when the Saudis tried to bankrupt them in 2014-16, this time spending cuts “have been swifter than expected,” says Brian Singer, a managing director at Goldman Sachs Group Inc. (…)

Riyadh is obsessed with an energy market that is being shaped by the fight against climate change. Aramco, on the prospectus for its 2019 initial public offering, warned that oil demand might peak within 20 years. The Saudis may be choosing a completely new strategy. As owners of a huge geological petroleum endowment, they could be moving to monetize their reserves more quickly to avoid being stuck with a rapidly depreciating asset. Energy scholars call it a “fast monetization strategy,” and Saudi advisers have been discussing it in private for some time.

The approach has advantages. It would secure a growing share for Saudi crude, as higher cost producers are pushed out of the market. Not just shale drillers, but even Big Oil, which is already under pressure from shareholders to boost profits, will have to cut spending on the development of new wells and, therefore, supply. Lower oil prices could also slow down the adoption of green technologies, particularly the electric cars that Tesla Inc. and others are building. And if Saudi Arabia and Russia can drive enough rivals out of business, perhaps the oil market would tighten again. ​

But the monetization strategy also carries enormous risk. Higher production, alongside weaker demand, is a certain recipe for low prices. If the kingdom follows it, others in OPEC will join, too, pushing even more crude into the market, further depressing prices. Saudi Arabia can barely afford that. According to the International Monetary Fund, Riyadh needs an oil price of about $80 a barrel to balance its budget. More important, its balance of payments only breaks even at about $50 a barrel. Without higher prices, Saudi Arabia will start to run large and sustained balance of payments deficits, putting the peg between its currency, the riyal, and the U.S. dollar at risk. Since he became de facto ruler of Saudi Arabia, Mohammed bin Salman has made a number of risky economic and political moves—the change of oil policy is one of the riskiest yet.

  • An inevitable fall to cash costs

Goldman Sachs sees (hopes for) a V-shape…

We now forecast that 2020 oil demand will see the highest historical fall of 1.1mb/d yoy, with at its trough late March an expected demand hit of 8 mb/d, with refining margins set to fall further from current levels. (…) We now forecast a global surplus of 3.9 and 5.7 mb/d in 1Q and 2Q respectively, with a peak OECD inventory build of 560 mb. (…)

This is leading us to now base-case our prior downside scenario of a fall in oil prices to cash-costs. We are therefore lowering our 2Q Brent forecast to $20/bbl from $30/bbl previously. Ultimately, such a fall to cash-costs would be consistent with the prior large bear markets of 1999, 2009 and 2016, when total storage capacity was never reached but local logistical saturation proved binding. (…)

We expect lower prices and a fall to cash costs to precipitate further supply cuts, with shale production now expected down 0.75 mb/d yoy by 4Q20 and high-cost producers outside of core-OPEC/Russia/Shale also down 0.6 mb/d yoy by 4Q20. While we attempt to allocate these production declines to high-cost producers, it is important to emphasize that when local logistical capacities are reached, forced production cuts no longer line-up with production costs, as was the case in 1999/2009/2016, with inland production in particular most at risk.

9. We now base case that oil prices will fall to cash costs. Data available on request.

We continue to expect that lower supply and normalizing demand later this year will bring the oil market back into a deficit of -1.5 mb/d by 4Q20 (vs. a seasonal deficit of 0.6 mb/d) and push prices higher. As a result, our 3Q and 4Q Brent forecast of $30 and $40/bbl remain unchanged. Even as prices recover, lower capex, higher costs of capital, curtailed service capacity and entrenched higher decline rates will all leave supply lagging the recovery in oil demand through 2021, driving spot prices even higher. (…)

SENTIMENT WATCH

The current selloff is one of the sharpest declines in history.

Peak-to-Trough Declines in Historical Bear Markets Since 1929

After The Panic Comes Resignation

The FT’s Cameron Crise draws an analogy with the Kubler-Ross stages of grief:

  • Denial: the classic initial refusal to believe that anything is different from the last 20 times you successfully bought a little dip
  • Anger: As losses intensify, phrases like “this market is so stupid” are heard more and more often
  • Panic: liquidity evaporates, risk premia and volatility soar, and even favorite trades are sacrificed in the name of risk reduction
  • Response: Policymakers offer up a response to solve the underlying issues, and despite initial hopes markets keep falling…BUT WITH LOWER VOLATILITY
  • Resignation: When it feels like the terrible trend will go on forever, at last a reversal is in sight [and when all hope is lost, the smallest bit of good news can make people money]

We seem to be at the response level…

Companies Mull Suspending, Ramping Up Share Buyback Plans Amid Coronavirus Gap, DSV Panalpina and major banks said they would halt their repurchase programs

(…) Twenty-three companies in the S&P 500 announced they would suspend their programs so far this year, up from none in 2019, according to equity research firm Birinyi Associates. Companies’ authorization of future buybacks through March 17, totaling about $153 billion, marked a 39% drop from the same period a year ago, according to data from Birinyi Associates. (…)

Buybacks - Quarterly Share Repurchases During Bull and Bear Markets

WHEN ZOMBIES MEET A BLACK SWAN

A notice sent to WeWork shareholders Tuesday said that SoftBank believes regulatory probes into the startup’s business, including from the Securities and Exchange Commission and Justice Department, give it an out under the deal struck last fall to purchase $3 billion of WeWork shares from existing investors. (…)

The development won’t affect the $5 billion lifeline SoftBank agreed to give WeWork directly—cash the startup badly needed then as it ran out of runway, and which it is likely to continue to need as the worsening coronavirus outbreak empties out its desks. (…)

Falling share prices, which lower the value of SoftBank’s massive investment holdings, are combining with WeWork’s pricey bailout and a recently announced $4.8 billion share buyback plan to weigh on SoftBank’s balance sheet. Credit-rating firm S&P Global Inc. cited all those factors when it announced Tuesday that it was cutting SoftBank’s credit outlook to negative. S&P noted that unveiling a share buyback in the midst of a stock-market plunge raised questions about SoftBank’s commitment to financial soundness. (…)

WeWork’s basic business model—signing long-term leases with landlords and subleasing short-term to companies—leaves it vulnerable to big drops in office demand, as it is still on the hook for its own payments to landlords. It previously has said it could withstand a recession because companies would turn to shorter-term office space.