The Daily Dose: What Looks Like Recovery Is Only A Mirage
- Signs of recovery are only a mirage.
- Brent takes a nosedive after grim US unemployment figures.
- Growth will be in fits and starts.
Things are going to get messy. Stock indices from the United States to Europe were in rally mode as investors bet on a return to business activity in the eurozone and some US states. In energy, most segments of the US economy are seeing an increase in refinery activity and implied demand for petroleum products is on the rise.
For the month so far, Brent crude oil prices are up some 25% and the late-April nose-dive into negative territory for WTI is a distant memory. But most models show too much optimism about recovery could cause another round of exponential spikes in coronavirus infections. For the economy, growth will be in fits and starts. In both cases, recovery will be uneven and fragile.
The price for Brent crude oil faltered after flirting with $31 per barrel mark in the previous session. The global benchmark was down by a half percent as of 8 a.m. ET to hit $30.81 per barrel.
A push by US President Trump to reopen the economy gave investors reasons to jump into the market even as corporate earnings continue to disappoint. Stock futures were pointing up early Wednesday, though much of the gains may be due to sentiment rather than positive data on growth trends. In Detroit, one of the US cities hardest hit by the pandemic, automakers are pondering when to shift their lines from making masks to making vehicles again. Michigan Gov. Gretchen Whitmer, a frequent target of criticism from Trump's base, has extended the state's stay-at-home orders through the middle of May to much frustration. Beneath the din of partisan rancor, players with boots on the ground remain pessimistic. The CFO at General Motors (GM), which released earnings on Wednesday, warned employees of "significant austerity measures" and the United Auto Workers labor union said it was "too soon and too risky" to put employees back in the plants.
But signs of life are too tempting to ignore for the struggling oil sector. Parsley Energy (PE), a small producer focused on Texas shale, has pivoted from embracing cartel-like control over output when prices were in the teens a few short weeks ago to saying life at $30 per barrel will be manageable without state control. A Saudi-Russia price war, demand destruction, concerns about a rising glut and overflowing storage erased at least half the value from the price of oil this year and operators like Parsley may be ready to pounce on the slightest ray of hope even amid calls for restraint.
For parties to the OPEC+ agreement, commitment is necessary on paper, but many players are too dependent on oil revenue to cut too deep. Coordinating across multiple contracts and fluid administrative districts in Iraq suggests it's unlikely that one of the world's leading oil producers will stick to its commitments. If Iraq is any sort of bellwether then discipline among the two dozen or so OPEC+ partners will certainly wane as the terms of the agreement remain in place, particularly if crude oil prices retreat from the bottom. If the solution to low oil prices is low oil prices and oil prices jump to soon, we've solved nothing.
We are not over this yet. A study by the RAND corporation found that while some of the hardest hit areas such as New York may have passed the peak, "the worst is yet to come." In some states with high numbers overall, such as California and Michigan, the researchers found that "drastically reducing social distancing can increase cases to unmanageable levels."
For the economy, the European Commission's spring forecast was dire. Growth in the euro area drops nearly 8% this year and is expected to recover by 6.3% in 2021. Recovery will be uneven, the forecasters said the risks are "exceptionally large" and the global pandemic "could also leave permanent scars through bankruptcies and long-lasting damage to the labor market." In the US, the era of ultra-cheap gasoline may be over just as private payroll processor ADP reported its biggest spike in unemployment claims since it started keeping track in 2002. What looks like recovery for oil this week is only a mirage.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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