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What negative oil prices mean for the COVID-19 economy

 

There was a worldwide shock when U.S. ended with negative oil prices for May contracts. It dropped to minus 38 dollars a barrel this week, crashing into negative territory for the first time in history.

 

While demand has dried up as the COVID-19 pandemic paralyzes economies and keeps people at home,… excess supply is in limbo not helped by an intense price war between Russia and Saudi Arabia.

 

What do these ultra-low oil prices mean for producers and what does it tell us about the world economy as it grapples with the coronavirus?

 

Today, we’re joined by Dr. Graham Ong-Webb who joins us from Singapore’s Nanyang University and Tony Nash, CEO and Founder of Complete Intelligence.

Arirang interview on negative oil prices

 

Show Transcript

AN: We start an in-depth discussion with experts from around the world. There was a worldwide shock when US oil contracts for May dropped to minus $38 a barrel this week, crashing into negative territory for the first time in history. While demand has dried up, has the COVID-19 pandemic paralyzes economies and keeps people at home? Excess supply is in limbo, not helped by an intense price war between Russia and Saudi Arabia. What do these ultra low oil prices mean for producers?And what does it tell us about the world’s economy as it grapples with the Corona virus? Today, we’re joined by Dr. Gray Ong WebB, who joins us from Singapore’s Nanyang Technological University. And Tony Nash, CEO and founder of Complete Intelligence.

 

AN: My first question to you, Dr. Ong-Webb. First, what caused the US oil prices this week to fall to such historically low levels?

 

OW: Well, we’ve seen the slashing of oil prices all around West Texas and intermediate and global crude oil have plummeted because of the severe price for it occurred over the weekend, particularly led by Saudi Arabia that sought to slash oil prices by about four to seven dollars a barrel. And this price war was triggered by the implosion of the OPEC Plus Alliance a week before between, in terms of the breakdown in the orchestration between Russia and OPEC led by Saudi Arabia trying to come to an agreement about the cut in production. As you know, previously there was no agreement to cut production by 7 million barrels.

 

OW: But of course, the Russians withdrew from this discussion with the concern that this would be using a lot of space to U.S. shale oil companies to occupy the gap. So Saudi Arabia went onto this price war, which then triggered a cascade into negative territory, which was, as you mentioned, unprecedented in history. But really, I think this is the story about the collapse in oil prices is a confluence of a lot of factors that you can discuss today. This is a very interesting industry, as you know, because of the way the oil sector is set up.

 

AN: Right. In Russia and Saudi Arabia, they did come to an agreement eventually. But people are saying that the OPEC’s decision to cut oil production came much too late. And while, Mr. Nash, all eyes are now on the futures contracts for June, but that really hasn’t been much cause for optimism has that admit this pandemic can as for calls for a swift economic recovery get thinner and thinner. Actually, some analysts are saying that oil prices for JUne, they could actually fall to minus a $100 per barrel. What’s your take on this?

 

TN: No, I think it really all depends on how soon economies get back to work. We have a couple of states here in the US, Georgia and Tennessee, that have said that they’ll get back on line very soon, possibly by next week. So if other states follow them, I think you’ll start to see demand pulled and crude oil pulled along with that demand if it gets started. If it gets pushed back in the president’s daily briefing, he just said today that they may consider, you know, pushing some of these social distancing and other requirements further into the summer if the state level economies stay as locked up as they’ve been.

 

TN: I think it yeah, it could be pretty terrible for crude oil and it could be pretty terrible for most commodities. So, again, it really all depends on how quickly the countries around the world get back to work. And it really depends on the local governments as well as the national governments making those decisions to put people back to work. What’s interesting here in the states is we’ve started to see people protest in cities across the country to get back to work. And so there is a couple of restaurants here in Houston, a couple of businesses around the country that are insisting that they stay open. A restaurant here in Houston will start sitting people this Friday night.

 

AN: And the businesses may want to go back to normal. But, well, it looks like demand might not pick up quickly, I mean. But then this also isn’t just a U.S. problem as you mentioned. Brent crude has been faring better than U.S. shale for sure, but it’s also taking a hit amid a supply glut lessened by the price for that Dr. Webb just mentioned between Russia and Saudi Arabia. And when in this situation when demand has plunged as much as 30 percent globally and as much as 70 percent in countries like India could Brent also flip negative do you think, Mr. Nash?

 

TN: Now, look, the reason that Brent that WTI went negative was it’s a function of the exchange that it trades on and on the NYMEX exchange, they let those prices go negative because of, partly because of physical delivery of crude oil. But WTI also traded on the ICE exchange where Brent is traded. And the ICE exchange didn’t let WTI go negative. They let it go to zero. So I think the worst case we’ll see for Brent is a zero price simply because the exchange won’t let the price go below zero or they haven’t let it go below zero. So if ICE, if the Inter Intercontinental Exchange stands in the way of seeing negative Brent prices, then you just won’t see negative Brent prices and they’ll stop trading.

 

AN: So you think that there might be some kinds of intervention going on there? Dr. Ong-Webb, well, OPEC is due to start cutting supply by 9.7 million barrels per day, and that would be reducing about 10 percent of global supply from May 1st. That is a historic cut. But do you think that’s enough?

 

OW: I can clearly, the answer is no. Whether you are your own oil expert or whether you’re an observer of markets and how the global economic machinery is moving, or in this case has seized, it’s come to a grinding to a halt. Well, the answer is, as I mentioned, no. I mean, we know for the month of April we’re seeing a reduction in terms of demand by about a factor of three to the agreed all production cuts by the cartels by 9.7 million barrels. Also we’re looking at 30 million barrels less consumed in April. So clearly that’s an indication that first, we have a cuts, if you like, not enough. And there will have to be, whether we like it or not, all cuts along the way, simply because in allusion to his point about storage capacity, which is an important factor in the price equation of oil, is that there’s just no way to put oil anymore. I mean, tankers are filled to the brim. I mean, 60 percent of storage capacity globally is being filled up by the end of April, I think, by the beginning of May, there’ll be just simply nowhere else to put the oil. And so, there will have to be a slash in production. But this is just an easy thing to say because of the complexities of the way in which oil is produced, the infrastructure behind oil. We can’t simply just turn off the taps. And the oil production companies know this, that if fields are closed, they’re just simply difficult to reopen and we’re unlikely to resume them and achieve the prior optimalities in production. I mean, you can get back to those production capacities again. So a lot of push and pull factors at play here.

 

AN: So really the last major oil export. There is an incredible amount of pressure. And Dr. Ong-Webb, the oil crisis in the mid 1980s actually preceded the fall of the Soviet Union or made the pace rapid. If global oil prices remain around the $20 threshold, then which economies are going to be in hot water?

 

OW: Well, it all depends, right? So in the case of I mean, maybe Tony could speak to this more than I could about what’s happening in the US. On the reports I’m reading, I think thirty US dollars a barrel would help keep things afloat, literally. $30 a barrel or below, this will lead to more job cuts, especially to minor players in the oil industry are going to fall and lots of medium-sized and small producers in the US. Even in a place like in the Gulf states, where large margins are required because of the government’s subsidies and whatnot. I think quite a few golf econ might also. That it all depends. But clearly, despite the pursuit of more production efficiencies, especially the kind of efficiency we saw come out from all the previous oil slump in 2014, there is this complete collapse in demand and there’s no way of getting around that. And companies are going to fall. Jobs are going to be lost. And we just have to find a way to do to stave this off.

 

AN: And Mr. Nash, while hundreds of companies in the US, all companies are going to be very hardly hit by this decline in consumer demand, and also this is going to affect thousands and thousands of jobs. How do you think this is going to affect the pace of recovery of the US economy from this pandemic recession?

 

TN: Yeah, again, I think since this is a global government shutdown, really the pace is completely affected by the rate at which governments release these curves. I think if they don’t release the curves, if they don’t allow people to go to work, I think it becomes more and more difficult to have a quick recovery, even remotely quick recovery.

 

TN: I don’t want to unnecessarily paint a doomsday scenario, but the longer we stay at home, the longer we don’t allow planes to fly in the sky, ocean vessels to move, we don’t have demand in food markets, demand in other markets, it really damages every industry. It’s not just crude oil. I think that the key thing that we have to keep in mind here is that U.S. crude companies appear to be more damaged simply because they’re more transparent.

 

TN: Most of the oil and gas companies globally are state-owned, so they’re national oil companies. So there really isn’t the visibility to their performance and their expenses that you get with U.S. energy companies. So make no mistake, those companies are hurting just as bad. And when you look at companies like Saudi Arabia, Iran, so on and so forth, those guys have to be making $60 a barrel or more in order to pay off their bills every month to run their governments.

 

TN: So while we talk about, say, fracking cost it 20, 30, 40 dollars a barrel, when you look at the fiscal position of many of these Gulf states and even Russia, Russia’s very expensive to operate, until they’re making $60 a barrel or more, they’re actually losing money. So these guys can not afford to play this game very long. And I think they played their card at the wrong time because there’s a global demand problem at the same time that they’re trying to fight this war. So really, they’re hurting the U.S., but they’re really hurting themselves just as bad or worse.

 

AN: Exactly. And that’s very clear that the historically low oil prices will affect all global players. But it seems that Saudi Arabia and Russia, they all vying for this all supremacy, and Dr. Ong-Webb, just before you go, if that’s the case, do you think it’s worth? And over the coming months, who do you think has the biggest chance of emerging victorious?

 

OW: Well, it’s really hard to say. I think I agree with Tony that I think there are no winners in this game. And that’s that’s a problem we are facing today. We’re in the new normal. A lot of the previous assumptions or principles that govern competition, economic and political competition, are actually hurting us instead, because a lot of things that we have to do today are counterintuitive. And we are in an unchartered territory. Countries like Saudi Arabia and Russia are simply just following their political strategic instincts, if you like, which have served them well in the past, perhaps, but not anymore today.

 

OW: And so I think they’re not only going to hurt themselves. They’re going to have a further contribute to the further negative impact on the global economy. Clearly, there will be some winners out of this. If you’re in a storage business, I suppose especially oil tankers, I think its glory days for you right now, maybe momentarily. And of course, you’re energy hungry, oil importer perhaps, some have savings there. But then again, because of the collapse in demand, I mean, not much had either. Until the national economies and the global economy starts to move again and people are moving around naturally and buying things, buying services, I think all of us are going to continue to be hurt.

 

AN: So really, oil prices are really dependent on demand and we’re not seeing much of that and it looks like it won’t be coming back in in the near future.

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World economy, industries changing amid COVID-19

 

The world faces an unprecedented economic crisis as shops and businesses, factories and entire communities have been put under lockdown due to the coronavirus pandemic. Governments are doing their best to cushion the blow and keep their economies intact, but many people say things won’t be going back to normal… even when this pandemic is over. According to them we are in a “new normal.” To see how economies and industries across the world are already shifting to this new reality, we connect with Dr. Larry Samuelson, Professor of Economics at Yale University, Tony NASH, CEO and Founder of Complete Intelligence, and Dr. Graham Ong-Webb who joins us from Singapore’s Nanyang University.

 

Interview Notes

 

AN: My first question to Dr. Samuelson, which industries do you think will struggle to recover after this pandemic and even despite the huge sums of money being poured into them right now to try and keep them afloat?

 

LS: The huge sums of money are designed to get the industries through this initial period when much of the world is locked down and firms’ whole industries have no obvious or no steady source of revenue. Once we are past that, hopefully we see some opening of economies soon, we still have a recession on our hands. And at that point I would say that consumer confidence is the key thing to monitor it’s difficult to recover that under an ordinary recession. Now we’re gonna have to recover that in the midst of still dealing with the coronavirus.

 

We won’t have the virus behind us until we have a vaccine, which looks like it’s perhaps a year off and so we’re gonna have to try to reopen our economies where people are still worrying about the virus. So now we can ask about industries the ones that will fare best are those that people can reasonably, safely interact with. We expect retail some education to fare better than say mass sporting events and confine travel in that respect.

 

Can also look at which industries represent activities, purchase is that people ordinarily do that they have deferred and which are discretionary. The deferred ones we might expect to come back fairly quickly. As a frivolous example think of all the haircuts people are going to need when they come out of lockdown. Things like automobile purchases durables home maintenance might be in the same category. More discretionary items like travel are going to take a longer time to come back.

 

 

AN: So what you’re saying is that recovery will really depend on consumer sentiment and it looks like the sort of high-touch industries where you know and where it involves travel or social contacts those are going to be a bit slower to recover? Well Dr. Webb the, European Union they’ve agreed on a 500 billion dollar stimulus plan to protect workers businesses and their Nations in light of this pandemic but they haven’t been able to agree on issuing debt to raise long-term financing for the region what do you
make of this still is it really enough for the region?

 

OW: Well it appears to be clearly insufficient for for the requirements of what stands to be a 19 trillion dollar economy. We think about the European Union. 27 countries as a collective this is second largest economy you know in PPP terms after China. And so you know the amount of – a billion dollars pales in comparison to what other national economies are injecting in terms of stimulus packages to stave off the risk of a severe economic crippling, mass layoffs and so forth.

 

So I think the ECB was right to to campaign for about 1.5 trillion dollars and clearly we’ve ended up with 500 billion dollars and that’s not going to be near enough to what the region needs. But nevertheless, yes, there is this big issue in the backdrop of who’s gonna finance or finance all of this. And this is clearly a follow-on discussion from the one we had last week about the global debt crisis right. So no basic were looking at trade-offs here, which trade-off are we willing to live with, the one where we deal with or crisis now in terms of mass unemployment, crippling economies, whether we deal with a lengthy debt crisis down the road, you know, sort of alleviating the pain today.

 

So I think this is an ongoing discussion but clearly the $500 package is a compromise, a severe one. Southern European states have compromised themselves. They’d rather get something rather than nothing. But clearly it’s insufficient in terms of what’s already percolating in terms of small and medium enterprises folding up as we speak, people losing their jobs because of the slump in demand are all around for range of services and inability for those services to to actually meet consumer needs because of the of the lockdown.

 

 

AN: So it looks like there may be more coming out of the EU as this pandemic progresses and the economies continue to be hurt. Well Dr. Nash, here in East Asia China has actually restarted its economy factories are back online and lockdowns on cities even Wuhan they’ve been east. But with the rest of the world they closed for business. Many say that China is actually in for a second supply shock. What’s your your take on this?

 

TN: Sure. Our biggest worry about China, well, we have a number of them but we’re actually worried about the fall in manufacturing. The industrial production collapse in China that we see coming starting in, say, April and then going into third quarter should be unfortunately pretty damaging to China’s economy. We expect to see deflation starting in April, May in China. It’s not like 10 or 20 percent. It’s kind of half a percent, but still once you start to dip your toe into deflation, it can be pretty dangerous, so starting and then stopping.

 

The thing that we have to remember with all of these economies is that these are government-mandated shutdowns of the economies. These are not market failures. And so the EU issues 500 billion dollars and euros for a fiscal plan. It’s not the small companies, even the large companies’ fault that this is happening. So the governments have and will continue to push money into the economy because they know that this is their fault. It’s their responsibility. The companies aren’t failing. It’s the government that’s failed the companies by not having a plan and not having the resources in place to manage this.

 

 

AN: So that’s no need for such huge pessimism, I suppose. So you think that as long as the government’s take the right actions and the full might I mean that the second supply shock or another sort of sort of impact might not be as big. Well Dr. Samuelson some say that China could employ what some call it a trap diplomacy either by seizing other country’s assets or forgiving that to boost its soft power if it does employ this kind of tactic then could we see the world order actually change?

 

LS: We have to remember that the question of debt-trap diplomacy was here well before the pandemic. Critics of China have been concerned about this for some time. I don’t have a good idea. It’s very hard to say whether the pandemic is going to exacerbate. The concerns people have about debt-trap diplomacy, it might if it puts other countries that China is dealing with in a particularly adverse position. But it might not. It’s having an effect on China. That may make things more difficult for them.

 

I think more important is to remember that when we talk about debt trap diplomacy, we tend to think of international trade of economic relations between countries as a competitive or an antagonistic activity, where the most important thing to keep in mind is that international trade is at its heart a cooperative activity. We engage in it because countries on both sides gain from international trade.

 

As China invests in other countries, as it deals in other countries, it acquires some influence in those countries and some people are worried about that. That’s where the term debt trap diplomacy comes from. But it also becomes linked to those countries and has an interest in those countries and that creates a force going the other way. I think on balance it’s important to remember that there are some real gains to our world economy.

 

Some risk, some supply chain risks, that we have seen. Some political risks that some people worry about. But on that I think there are real gains from having the International economy linked together. We see these gains in terms of our economic well-being. I think we see these gains in terms of our political well-being as well. Countries, as they trade, as they deal with one another, tend to have common interests that in the long run are good for all of us.

 

 

AN: Well, so we really need to see more cooperation and continuous trade between nations especially in times of economic crises. Well Dr. Ron Webb, how do you expect this tug of war between the US and China to play out during this pandemic, especially as their bilateral relations worsen because of the COVID-19 pandemic?

 

OW: Well, you know the future is contingent clearly. But I think in terms of the current trajectory, it looks like this tug of war, this ongoing bilateral trade war between these two economic juggernauts, will continue unabated I mean from the recent news reports of President Trump’s speeches and his articulations on the issue, it’s quite clear that the US administration is doubling down on its protectionist measures against not only China but also even the European Union and also Mexico.

 

So I think the COVID-19 challenge which is having an impact of across various domains including economics and technology and so forth will continue without much foreseeable change. I think this effects you know the global economy. It has been even pre COVID, but I think it’s not helping the situation whatsoever in the current climate.

 

 

AN: Right. So, we expect these technological sort of competition and the sort of trade disputes that we’ve seen in the past, they’re not just going to stop short because of this pandemic that’s going on. They’re going to continue. Nevertheless, well just before we go,  Mr. Nash, some say that there could be a rebound in the latter half of the year. When do you think the worst of this pandemic
will be over on the economy?

 

TN: Yeah, I think it really depends. I think it depends on a country’s ability to issue a fiscal stimulus. I think it depends on the concentration of manufacturing of those economies, and I think it depends on let’s say workforce flexibility. So, with those, I think China is not in a great position. I think China is going to have a very rough year ahead. The official data may not report it, but we envision a very rough year ahead for China.

 

We think Europe will have a rough third and fourth quarter. Of course, late in the fourth quarter, we see Europe starting to come out of this. But both of those are constrained because they don’t have a U.S. dollar basis to issue fiscal stimulus. Their companies have U.S. dollar debt and their countries are having to borrow US dollars into their Treasuries in order to keep trade and other things going. So they have real problems.

 

The US has already issued 2.2 trillion fiscal stimuli plus a lot more from the Fed. And so, the US has had the ability to stimulate the economy. It hasn’t really had traction yet. But of the three kinds of general regions, what we’re seeing is the US, although they’re all very difficult situations on a relative basis, we see the US doing much, much better because of the US’s ability to issue fiscal stimulus and to play monetary policy with the US dollar. So the US dollar is a huge asset for the US.

 

The large millennial bracket is a huge asset for the US. It’s a workforce that’s actually contributing to the overall dependency ratio and then the ability for US companies to pull their manufacturing back to North America, this is not absolute it doesn’t mean a hundred percent, but some manufacturing will certainly be diverted to Mexico for a number of reasons, and we see that taking catching pace in, say, q3 and q4. And that allows the US to do more value-added activities through the course of recovery.

 

AN: Right. Well, each region is going to have its own challenges and an unprecedented pandemic really does bring unprecedented complexities when it comes to recovery. Well I’m afraid that’s all we have time for today it’s been a very great discussion.