The End Of A Decade-Long Bull Run

1. Commodities crash

- The 11-year bull run for the Dow Jones came to an end this week, officially falling into a bear market on Wednesday, shortly after the World Health Organization declared the coronavirus outbreak a global pandemic.

- “Both the real economy and the financial economy are exhibiting acute signs of stress,” Goldman Sachs said in the note.

- The Federal Reserve cut interest rates by 50 basis points last week and is under pressure to cut again immediately.

- “The Covid-19 pandemic is proving to be both a demand-side (with damage to travel, tourism, and any activities involving large crowds) and a supply-side shock (with major disruptions to supply chains),” IHS Markit wrote in a commentary. “It appears that the peak impact will not occur until late in Q2 or in Q3, thus IHS Markit assumes a U-shaped rather than a V-shaped cycle, with a sharp reduction in 2020 global growth.”

2. Saudi opens the spigots

- Saudi Arabia said it would begin producing at unprecedented levels, ramping up to over 12.3 mb/d, which is above what it is thought to be able to sustainably produce.

- The UAE followed by saying that it would ramp up to 4 mb/d, adding 1 mb/d. Russia said it could increase by 0.5 mb/d. The price war is on and the market is about to see a tidal wave of new supply.

- Riyadh may be trying to crash the market so fast, that perhaps a “shock and awe” strategy is aimed at bringing Russia and others back to the table.

- The one silver lining is a “buyers’ market” for refining, according to JBC Energy, which could last 6 to 18 months. Refining margins rose as oil prices fell.

- But unlike in 2015, when demand was rising (+1.5 mb/d) amid a supply glut, this year demand is falling (perhaps by 0.5 mb/d), which means that refiners can’t ramp up to take advantage. Oil feedstock is cheap, but demand for refined products is plummeting.

3. Supply glut of 4 mb/d?

- The EIA said that the oil market might see a surplus of 1.7 mb/d in the first half of the year. But that is a small figure compared to some other estimates. Standard Chartered says that supply could exceed demand by 5.5 mb/d in the second quarter.

- “Statements from major producers over the past two days, particularly those from Saudi Arabia and the UAE, suggest that we have underestimated the surpluses,” the investment bank wrote in a note.

- The bank said that inventories could increase by a massive 1,400 million barrels between March 2020 and August 2021.

- “That amount of oil would fill 88,000 Olympic swimming pools,” Standard Chartered wrote. “If you placed those swimming pools in a line lengthwise, they would cover the distance from New York to San Francisco.”

- The bank said that U.S. oil production could fall to 11.3 mb/d by the end of 2021, down from 13.1 mb/d today.

4. Shale debt wall looms

- Shale drillers find themselves in a crisis with oil prices at about $30 per barrel. And the timing couldn’t be worse.

- North American oil and gas companies have a combined $200 billion in debt maturing over the next four years, according to the Wall Street Journal. Roughly $41 billion falls due this year.

- The recent fall in oil prices has eliminated a lot of options that drillers might have to postpone debt, raise new funds or otherwise find a way to survive.

- “The impact on companies is less about earnings and more about solvency,” Jefferies analyst Sean Darby told the WSJ.

- More than 200 North American oil and gas companies have declared bankruptcy since 2015, and that figure is destined to rise significantly.

5. China’s car sales plunge

- The largest auto market in the world saw car sales plunge by 80 percent in February. The effect is felt around the world as factories idle and financial equities sink.

- The pandemic may cause China’s GDP to shrink by as much as 6 percent in the first quarter.

- The airline industry could lose as much as $113 billion from reduced air traffic.

- “Without a lifeline from governments we will have a sectoral financial crisis piled on top of the public health emergency,” The International Air Transport Association (IATA) said.

6. Investors flock to gold

- Gold is an obvious beneficiary during times of economic turmoil.

- Positions in gold-backed ETFs increased by 55 tons over a three-day period this week, accounting for almost a third of year-to-date inflows, according to Bloomberg.

- “Gold continues to provide a safety net as financial markets tumble,” Stephen Innes, chief Asia market strategist at AxiCorp Ltd., said in a note. “It just feels flat-out comfortable owning gold in this environment.”

- Gold prices have climbed more than 22 percent over the past month.

7. Worst of pandemic for U.S. about to arrive

- The pace of the pandemic in the U.S. has accelerated, and the U.S. is on track to follow the path of Italy, which is in the middle of a nationwide lockdown.

- Hospitals in Italy are at the breaking point, and there is little reason to think that the U.S. is on track to bend the case curve down.

- The flurry of major event cancellations spiked this week, with Washington State and California banning mass gatherings. Major sports leagues canceled their seasons. Long-term school closures are multiplying. President Trump announced a 30-day travel restriction to and from Europe.

- On Thursday, the Federal Reserve said it would pump trillions of dollars into the financial system in order to shore it up.

- But with the U.S. economy about to suddenly go into a much slower gear, more damage likely lies ahead.