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S&P Global — 16 Mar, 2020

COVID-19 Daily Update: March 16, 2020

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By S&P Global


As more countries and cities close their restaurants, businesses, and borders in an effort to control COVID-19, the spread of coronavirus continued to impact oil and financial markets.

Crude oil prices have declined sharply over the past week after the OPEC+ Alliance failed to reach an agreement. Russia opted out of a Saudi-led proposal to extend and deepen crude production cuts that had been central to a nearly three-year agreement to manage oil supplies . Oil prices have since collapsed by as much as 30 percent. Low oil prices may dampen demand and economic growth, pressure U.S. local government and school districts’ budgets, and drive producers to insolvency.

After 11 years of steady gains, last week the S&P 500® slid into bear market territory. Energy is the most impacted sector in the S&P 500® this year, dropping initially due to the COVID-19 outbreak and then collapsing further after the failure of OPEC+ negotiations..

Today is Monday, March 16, and here is essential insight on COVID-19 and the markets.

Crude oil futures slide as the coronavirus spreads worsens globally

Crude oil futures were lower in mid-morning trade in Asia Monday as the growing coronavirus spread continues to dampen the outlook for demand and economic growth. At 10:35 am Singapore time (0235 GMT), ICE Brent May crude futures were down $1.07/b (3.2%) from Friday's settle at $32.78/b, while the NYMEX April light sweet crude contract was 64 cents/b (2%) lower at $31.09/b.

— Read more from S&P Global Platts

Lower Oil Prices May Create Budget Pressures For Some U.S. Local Governments And School Districts

Many school districts and communities in Alaska, Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, and Texas have concentrated economies heavily dependent on the oil and gas industry. As a result, S&P Global Ratings believes a prolonged period of low oil prices could rapidly create negative credit pressure for some obligors in these states, similar to the winter of 2015/2016 when oil prices declined below $35 a barrel (West Texas Intermediate; WTI), causing assessed values (AVs), sales tax collections, and other credit metrics to drop significantly.

A prolonged period of low oil prices could pressure employment, assessed valuation, and the general economic outlook of local governments throughout oil-producing states. We believe that sales tax revenues are at greatest risk for significant declines in oil-producing states, based in part on historical performance during the previous period of low oil prices. Risks vary across states given industry exposure, particularly when considering the different facets of upstream, midstream, and downstream operations. 

— Read more from S&P Global Ratings

Why Saudi Arabia’s oil price war is doomed to fail: Fuel for Thought

Oil price wars rarely achieve their objectives. Saudi Arabia and Russia racing to out-pump each other is unlikely to be any different. Instead of declaring a victory in seizing market share back from their common rivals in the form of US shale, the main protagonists in Moscow and Riyadh are more likely to cause long-lasting damage to petrodollar economies already under pressure from demand destruction caused by climate change action and the onslaught on the global financial system from the coronavirus pandemic.

The effective collapse of the OPEC+ coalition when the group and its allies failed to agree on an additional 1.5 million b/d of cuts on March 6 has triggered a 30% collapse in prices, with no floor in sight. Brent crude is now threatening to dip below $30/b and test levels last seen back in 2004. Some industry veterans even fear prices could plummet further to historic lows. 

— Read more from S&P Global Platts

Kremlin spokesman says Russia not surprised by oil price drop: report

The recent sharp fall in oil prices has come as no surprise to Russia, President Vladimir Putin's spokesman, Dmitry Peskov, was quoted as saying Monday by the Prime news agency. "There were expectations and forecasts that there would be a period of falling oil and energy prices," he said. 

— Read more from S&P Global Platts

Oil price collapse driving more producers to brink of bankruptcy

When the 2014 to 2016 oil and gas price collapse took hold, a large number of independent producers found themselves in dire straits. If prices do not rebound quickly in 2020, the industry could be facing a similar situation, or worse.

During the two-year price downturn, producers who had overspent in an effort to expand were faced with suddenly overloaded balance sheets and high breakeven prices. That left many dealing with the prospect of bankruptcy, and at least 70 filed for Chapter 11 bankruptcy protection in 2016 alone. Producers now have far lower breakeven costs, but a number still have damaged balance sheets dating back a half-decade. Prolonged exposure to prices in the low- to mid-$30 per barrel range could push many over the edge. 

— Read more from S&P Global Market Intelligence

Persian Gulf region reports first coronavirus death as containment measures extended

The Persian Gulf region has reported its first coronavirus death in Bahrain as governments extend measures to combat the virus' spread as the number of registered infections spiraled to over 960. In Qatar, the government has announced a Riyals 75 billion ($20.6 billion) stimulus package to support its economy, following in the footsteps of the UAE's Dirhams 100 billion ($27.2 billion) and Saudi Arabia's Riyals 50 billion ($13.3 billion) plans announced over the weekend. Qatar will from Wednesday suspend all incoming flights for a 14-day period that can be extended, except for cargo and transit flights. Qatar is the hardest hit country in the six-member Gulf Cooperation Council, with over 400 confirmed cases, while Oman is the least affected with some 22 cases. The other members of the group are Bahrain, Saudi Arabia, the UAE and Kuwait. 

— Read more from S&P Global Platts

Saudi Aramco reports 21% drop in 2019 profit on lower prices

Saudi Aramco, the world's largest crude oil exporter, said Sunday its 2019 profit fell 21% to $88.2 billion due to lower oil prices and reduced output. It reduced 2020 estimated capital expenditures due to "current market conditions." The drop from $111.1 billion in 2018 was "primarily due to lower crude oil prices and production volumes, coupled with declining refining and chemicals margins, and a $1.6 billion impairment associated with Sadara Chemical," Aramco said in a statement. A webcast is scheduled for Monday at 3pm local time (12:00 GMT). 

— Read more from S&P Global Platts

No Gas Left in the Tank for Energy Equities

Energy is so far the worst-performing sector in the S&P 500® this year, dropping initially due to the COVID-19 outbreak and then collapsing further by more than a six-sigma move after the end of the OPEC+ alliance. With Russia and Saudi Arabia engaging in a new market share battle, oil prices raced to decade lows. The highly levered U.S. energy names that comprise the S&P Equity Commodity Energy Index are now facing one of the toughest times in recent memory. 

— Read more from S&P Dow Jones Indices

CHART OF THE DAY

US forward gas prices lift despite plunging oil

What’s happening? US benchmark natural gas prices for next winter’s peak-demand months of December, January and February have strengthened as much as 20 cents, or about 9%, over the past week as forwards markets respond to the recent fallout in oil prices. On March 10, the January 2021 contract edged up to $2.69/MMBtu, or its highest since mid-January. The move suggests that traders anticipate a slowdown in oil and liquids drilling this year, which could be sufficient to lower US production of associated gas and trim next winter’s inventory levels.

What’s next? According to S&P Global Platts Analytics, US associated gas production is likely to remain flat this year, even amid a slowdown in oil and liquids drilling. Stickiness in associated gas production is attributable to various factors, but stems primarily from the production profile of the typical unconventional well, which tends to yield a higher gas-to-oil output ratio over time. In a worst-case scenario, Platts Analytics expects that sustained oil prices around $30/b could see total US gas production decline modestly through December, falling some 400 MMcf/d to 800 MMcf/d from its current level around 91.2 Bcf/d.

— Read more from S&P Global Platts

Analysis: Oil price crash won't alter LNG term deals landscape anytime soon

Crude oil's sudden price collapse may offer temporary breathing space to oil-linked term LNG buyers, but it won't drastically alter the scope of LNG term contract negotiations unless those low price levels are sustained over a longer period, analysts told S&P Global Platts. Although oil's price fall has narrowed the gap between spot and term LNG prices, it's too early for the LNG market to jump to concrete conclusions on what proportion of the fall is backed by supply-demand fundamentals and to what extent it's investor-driven.

— Read more from S&P Global Platts

Insurers expected to be resilient through pandemic, global recession

Restaurants, bars and stores have already begun closing across the globe in an effort to limit exposure to the coronavirus. Swiss Re expects the situation caused by the pandemic will get worse in the U.S. and Europe before it gets better. S&P Global Market Intelligence caught up with Thomas Holzheu, Swiss Re's chief economist for the Americas, to discuss his outlook for a global recession and how insurers might be impacted by the rapidly changing environment. 

“Global recession is our base view at this point and means that we will have a technical recession or a decline in GDP in certain G-7 countries, particularly in the Eurozone, Italy and Germany. These are countries that were already going into the situation with weak growth. At the point of writing our report, we stated that in the U.S. and China we don't call a recession at this point, but a very high risk of recession. We’re basically at the cusp. China has obviously already had negative impact in the first quarter. For Europe and the Americas, we would see that negative impact hitting here in the second quarter through the third quarter and then we would get a recovery from that going forward into 2021,” Holzheu told S&P Global Market Intelligence.

— Read more from S&P Global Market Intelligence

PODCAST OF THE DAY

Listen: Capitol Crude: US crude exports in the crosshairs of plunging oil demand, global supply glut

The fallout from the coronavirus and the collapse of the OPEC+ supply cut agreement have dealt US shale producers a massive blow. How the sector ultimately fares might depend on where US oil exports are headed.

US crude exports climbed above 4 million b/d in the last week of February, but will that represent a peak for this year and beyond?

Port of Corpus Christi CEO Sean Strawbridge joined Platts senior editor Jordan Blum in Houston to talk about how US exporters are weathering this storm.

— Listen to the episode from S&P Global Platts

Coronavirus pandemic throws wrench in banks' CECL planning

The coronavirus pandemic is adding complications to banks' plans to implement a major accounting change and will likely ding their earnings in the first quarter, analysts say. Banks were already working to figure out how this year's switch to the new current expected credit loss accounting standard, or CECL, will impact the reserves they are required to set aside to guard against the probability of a loan going sour.

Now, the coronavirus and growing fears about a global recession have thrown a wrench into that planning. CECL requires banks to set aside reserves for the lifetime expected losses on loans as soon as they originate them, a method that is sure to lead to a substantial increase in banks' provisioning this quarter given the expected weakening of economic growth. Banks have historically set aside those reserves as soon as losses on loans become probable, rather than CECL's requirement for up-front provisioning.

— Read more from S&P Global Market Intelligence

The Darkest Hour

The bull market is over. After 11 years of impressive and relatively steady gains, last week the S&P 500® slid into bear market territory, marking the end of the glory of the 2010s and the start of a new regime. Volatility is back with a vengeance, and safe haven assets are now the belles of the ball. But what does this mean for markets? Should we panic yet? The short answer is: probably not.

Our intent is not to call a market bottom or to predict short-term movements, but rather to highlight what history tells us: the market tends to recover. Unless there is an absolute need for immediate liquidity, riding out the storm has generally been a better decision than running away at the start of a panic. In fact, many of the best days in the market have followed the worst ones. The only way to capture these rebounds is to be in the market. While timing the recovery is a fool's errand, betting that there will be one is a fairly safe wager. Consider that before you take your chips off the table.

— Read more from S&P Dow Jones Indices

Written and compiled by Molly Mintz.