Oil macro analysis, page-801

‘We are giving up on energy,’ say Jefferies analysts, who go on to compare the beaten-down sector to the ’62 Mets

That’s the decision made by analysts at Jefferies, according to a note to clients on Wednesday. By the analyst team’s reckoning, the sector has lost 40% so far in 2020.

As if to underscore how personal the big loss feels, they added, “Energy is the new ’62 Mets.”

For some context, the 1962 New York Mets, in the franchise’s inaugural season, are often considered the worst baseball team in major-league history. They won just 40 of 160 games that year — put another way, they lost 120 games — a dubious feat unmatched since. (Baseball moved to its 162-game schedule from the previous 154 that same season; two postponed Mets games were not made up.)

The team was memorialized in a book by Jimmy Breslin called “Can’t Anybody Here Play This Game?”

And the title wasn’t a Breslin creation: It was a quotation from the Mets’ own manager, the legendary Casey Stengel, who made the remark in disgust.

The energy sector has seen similarly bad play of late.

In fact, energy is alone among S&P 500 sectors in an outright bear market, according to Dow Jones Market Data. It’s down more than a third from its recent high, marking the third worst bear market for the sector.

And an exchange-traded fund that’s one of the broadest and best proxies of the sector, the Energy Select Sector SPDR Fund XLE, -5.61% , having lost nearly a quarter of its value since the start of the year, may not be as bad as the group of stocks Jefferies is tracking, but it’s by far the worst of the 11 sectors represented by the Sector SPDR group of funds. The second worst category, financials, has lost about half as much (see attached table).

Dow futures fall maximum amount allowed, poised to plunge 1,300 points at the open as oil prices deliver a punishing blow to Wall Street

Stock-index futures hit daily limit with 5% fall

U.S. stock-index futures were down sharply Monday, falling to their daily limit, as fears of an oil price war between OPEC and Russia sent crude futures plunging, sending shock waves through global financial markets already shaken by the spread of COVID-19.

Analysts seeking safety fled into government bonds, sending the yield on the benchmark 10-year U.S. Treasury plummeting 25.1 basis points to 0.462% — another all-time low. Yields and debt prices move in opposite directions.
What are major indexes doing?

Dow Jones Industrial Average futures US:YM00 were down 1,255 points, or 4.9%, at 24,534, while S&P 500 futures US:ES00 were off 145.10 points, or 4.9%, at 2,819. Nasdaq Composite futures US:NQ00 were off 410 points, or 4.8%, at 8,093.25. Futures fell their 5% limit in early Asian trade and have traded near there for most of the session.

Stocks could see steeper losses when cash trading opens Monday. Initial circuit breakers kick in to temporarily halt trading with a fall of 7%.

Read:Here’s when S&P 500 circuit breakers kick in on Monday

On Friday, the Dow Jones Industrial Average settled 256.50 points lower, or 1%, to 25,864.78, while the S&P 500 US:SPX lost 51.57 points, or 1.7%, to close at 2,972.37. The Nasdaq Composite US:COMP finished 162.98 points lower, or 1.9%, at 8,575.62.

What’s driving the market?

“The slide in the oil price, along with further outbreaks of coronavirus across Europe, and the Italian government imposing a lock down across northern Italy and in around the Milan region, has accelerated the rush for the exits in stock markets sending U.S. bond yields to new record lows,” said Michael Hewson, chief market analyst at CMC Markets UK, in a note.

West Texas Intermediate crude for April delivery US:CLJ20 was down 21% at $32.38 after trading below $29 in earlier action, while May Brent crude UK:BRNK20, the global benchmark, 20.5% to $35.97 a barrel.

Oil futures plunged 10% on Friday after talks between the Organization of the Petroleum Exporting Countries and their allies collapsed with Russia refusing to agree to a Saudi-led plan for additional crude production cuts. In response, Saudi Arabia over the weekend slashed crude prices and is preparing to increase production, in a direct attack against Russia’s market share, The Wall Street Journal reported.

See:An all-out war for dominance has erupted among OPEC and its allies, and now oil investors brace for a race to the bottom on prices

Goldman Sachs analysts on Sunday said a price war could push crude prices toward $20 a barrel especially as the economic slowdown caused by the coronavirus outbreak slows global demand. Those price levels “will start creating acute financial stress and declining production from shale as well as other high-cost producers,” Goldman warned.

Read:Goldman says coronavirus and oil ‘price war’ could see crude plunge into the $20s

“Complete pandemonium at the open” wrote Stephen Innes, chief market strategist at AxiCorp, late Sunday. “The shock-and-awe Saudi strategy will propel oil markets into a period of radical uncertainty. Russia balking was one thing, but Saudi ramping up production is a bird of another feather.”
“U.S. shale and Canadian tar sands are in for a nightmarish year I fear,” wrote Jeffrey Halley, senior Asia Pacific market strategist at Oanda, late Sunday. “Production becoming a battle of who has the deepest pockets.”

On the COVID-19 front Italy virtually locked down its northern region containing about a quarter of its population, on Sunday in an effort to slow the spread of the coronavirus outbreak. Meanwhile, a number of schools closed in California and events were canceled, as a cruise ship hit by coronavirus prepared to dock in Oakland on Monday with authorities preparing plans to transport the 3,500 passengers to military bases around the country for testing and quarantine. As of Sunday, the virus had sickened 107,897 people world-wide, with 3,658 deaths.

There are now 111,284 cases of COVID-19 and 3892 deaths, according to the latest figures compiled by Johns Hopkins University. More than 62000 people have recovered. However, the outbreak in Italy (7,375 cases and 366 deaths) has now surpassed Iran (7,161 cases and 237 deaths) and is nearly as large as the outbreak in South Korea (7,478 cases and 53 deaths) in terms of case count.
Which stocks are in focus?

• US:AON Willis Towers Watson US:WLTW in an all-stock deal the firms say gives an implied combined equity value of approximately $80 billionAon said it’s buying insurance broker
• US:XLE US:XOM US:CVX US:COP US:OXY US:WMB US:KMI US:BKR US:MRO Shares of oil companies tumbled in premarket trade Monday, as crude prices fell 20% amid a price war between Russia and Saudi Arabia. The Energy Select SPDR ETF was down 16%, as major oil companies saw their prices slide up to 20%. Exxon Mobil was down 11.6%, Chevron Corp. was down 12%, ConocoPhillips slid 19% and Occidental Petroleum Corp. fell 25%. Williams Cos. Inc. shares were down 9%, Kinder Morgan Inc. was down 7%, and Baker Hughes Co. was down 15% and Marathon Oil Corp. was down 25%.
• US:GNTX Gentex raised quarterly cash dividend by 4% to 12 cents a share.

Goldman says oil price war and coronavirus could see crude plunge into the $20s

Shale producers face ‘acute financial distress’

Goldman Sachs commodity analysts on Sunday slashed their forecast for crude prices, after an alliance between Saudi Arabia-led OPEC and Russia collapsed late last week launching a new “price war” that threatens to deliver “acute financial stress” to shale drillers and other high-cost producers.

See:An all-out war for dominance has erupted among OPEC and its allies, and now oil investors brace for a race to the bottom on prices

Combined with the global shock to crude demand from the spread of COVID-19, the price war means the outlook for the oil market is “even more dire” than in November 2014, the start of a similar battle that ultimately took crude below $30 a barrel by early 2016, the analysts said.

“The oil market is now faced with two highly uncertain bearish shocks with the clear outcome of a sharp price selloff,” the analysts said.

Indeed, fears of a supply glut combined with a demand hit saw oil futures plunge more than 20% as markets reopened late Sunday. West Texas Intermediate crude for April delivery CLJ20, -20.979% was down $9.12, or 22%, at $32.16. May Brent crude BRNK20, -20.985%, the global benchmark, plunged $9.69, or 21.4%, to $35.58 a barrel.

The plunge in oil prices contributed to heavy losses for equities with U.S. stock-index futures limit down, pointing to steep falls for the Dow Jones Industrial Average DJIA, -0.98% and the S&P 500 SPX, -1.70%.

Read:Why oil just topped the coronavirus as the stock market’s biggest problem

A push by the Organization of the Petroleum Exporting Countries for members of the organization and its Russia-led allies to add to increase existing cuts by 1.5 million barrels a day was rejected by Moscow in talks that collapsed Friday without an agreement. Saudi Arabia over the weekend cut its export prices for crude, according to reports, in a move that was seen as aimed at undercutting Russia as oil powers engage in a battle for market share.

“We believe the OPEC and Russia oil-price war unequivocally started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years,” the Goldman analysts said in a note. “This completely changes the outlook for the oil and gas markets, in our view, and brings back the playbook of the ‘New Oil Order,’ with low-cost producers increasing supply from their spare capacity to force higher cost producers to reduce output.” (See charts below


Goldman Sachs
Oil was already under pressure before the OPEC+ alliance appeared to fall apart, with demand fears pushing both grades into bear-market territory earlier this year.

How low could they go now? Goldman said the demand shock from the spread of the coronavirus was equivalent to that seen in the first quarter of 2009 amid the financial crisis, while the production surge was likely to be much like that seen in the second quarter of 2015 amid the last price war — setting the stage for “a likely 1Q16 price outcome.”

“As a result, we are cutting our 2Q and 3Q20 Brent price forecasts to $30/bbl with possible dips in prices to operational stress levels and well-head cash costs near $20/bbl,” they wrote.

Those price levels “will start creating acute financial stress and declining production from shale as well as other high-cost producers,” Goldman warned.

Specifically, the analysts said they expect to see a “negligible” production response by shale producers in the second quarter, but then see output falling sequentially in the third quarter by 75,000 barrels a day and by 250,000 barrels a day quarter-on-quarter in the fourth quarter of 2020.

But that wouldn’t be enough, they said, to prevent a third-quarter surplus of 1.2 million barrels a day with inventories peaking above their 2016 highs as the spot price for Brent hovers around $30 a barrel, on average.

The negative feedback loop created by lower oil prices, which contribute to a slowdown in exporting countries’ economic growth, thereby weighing on oil demand, could ultimately require oil prices to fall to “operational stress levels for high cost producers with well-head cash costs near $20 a barrel,” they said.

Oil down 20%, set for largest 1-day plunge since 1991 Gulf War on fears of global price war

Saudi-Russia price war combines with coronavirus demand shock to sink oil prices

Oil futures plunged to a four-year low Monday, on track for the biggest one-day drop since 1991 as OPEC and Russia appear headed for an all-out price war — shaking a market already reeling from the demand shock created by global spread of COVID-19.

West Texas Intermediate crude for April delivery CLJ20, -21.318% on the New York Mercantile Exchange dropped $9.11, or 22%, to $32.16 a barrel, after briefly trading below $29. May Brent crude BRNK20, -21.339%, the global benchmark, was down $9.94, or 21.9%, at $35.25 a barrel.

The declines for both grades would be the largest since Jan. 17, 1991, according to FactSet, the day the U.S. and Gulf War allies bombed Iraq, kicking off Operation Desert Storm.

A push by the Organization of the Petroleum Exporting Countries for members of the organization and its Russia-led allies to deepen existing cuts by 1.5 million barrels a day was rejected by Moscow in talks that collapsed Friday without an agreement. That means existing curbs will expire at the end of March, leaving OPEC members and their erstwhile allies free to pump freely.

Read:Investors brace for a race to the bottom as all-out price war erupts between Saudi Arabia and Russia

“Given the breakdown in talks and the scale of the surplus over 2Q20, we have slashed our oil price forecasts significantly over the weekend and now forecast ICE Brent to average $33 a barrel over the second quarter,” said Warren Patterson, head of commodities strategy at ING, in a note.

“We would expect the market to test the lows seen in early 2016. Meanwhile uncertainty over the demand picture, as [COVID-19] spreads, only adds further downside risk.” The infectious disease, COVID-19, that was first identified in Wuhan, China in December has spread to more than 111,000 people and claimed nearly 3,900 lives.

Saudi Arabia over the weekend cut its export prices for crude, in a move that was seen as aimed at undercutting Russia as oil powers engage in a battle for market share.

“In doing so, Saudi Arabia has launched a new price war for market shares, with Russia no doubt being the main target,” said Carsten Fritsch, commodity analyst at Commerzbank, in a note.

Fritsch said oil will likely begin a prolonged phase of bottoming out, with the potential for volatility in both directions. Non-OPEC oil supply, however, is likely to fall in the second half as higher-cost producers, particularly shale drillers, feel the pinch, while demand for crude is likely to pick up as the spread of the viral outbreak slows later in the year, he said.

See: Goldman says coronavirus and oil price war could see crude plunge into the $20s

Meanwhile, the International Energy Agency on Monday slashed its global oil demand view, now seeing a 90,000 barrel a day decline this year, from a previous forecast of an 825,000 barrels a day increase.

In other energy trading, April gasoline futures RBJ20, -16.156% dropped 17.2 % to $1.1504 a gallon, while April heating oil HOJ20, -15.030% declined 15.5% to $1.17 a gallon.

April natural gas NGJ20, 0.000% was off 4.9% at $1.625 per million British thermal units.

www.marketwatch.com