COVID-19 Daily Update April 13, 2020

Yesterday marked the official end of the weeks-long oil price war between Saudi Arabia and Russia. After a four-day stalemate with Mexico, OPEC and its allied nations finalized a deal to cut oil production by 9.7 million barrels a day in May and June, and steadily increase production until the agreement’s expiration in 2022. According to S&P Global Platts, Saudi Arabia will hold its output to 8.5 million b/d, down almost 30% from the record 12 million it said it was producing this month; Russia will have an 8.5 million b/d quota, a 19% cut from the 10.5 million barrels of crude it was pumping; and the collective OPEC+ cuts will ramp down to 7.7 million b/d for the second half of this year, then to 5.8 million b/d for all of 2021 through April 2022. Backed by the G20 and encouraged by the U.S., the deal is the largest production cut in history—but may not make much of an impact.

Many analysts consider the deal to be insufficient given the dramatic drop in global petroleum demand caused by the coronavirus crisis. Market observers are projecting an oversupply of at least 20 million b/d in the coming months and a shortage of oil storage capacity.

Crude futures fell in early trading Sunday night. Today, the price of West Texas Intermediate crude oil teetered lower to $22.41 per barrel. The U.S. Energy Information Administration said the country’s shale-oil production will fall to 8.53 million b/d in May, down 183,000 in April, with declines seen in every major basin. President Donald Trump called for doubling the OPEC+ oil supply to 20 million b/d, writing on Twitter that the move would restore the energy sector faster. Saudi Aramco slashed official selling prices for its crude headed to Asia for a second consecutive month, even after the OPEC+ deal.

Alongside continuing uncertainty surrounding the stability of oil markets, financial market volatility and debate about when and how to reopen the global economy further cloud an uncertain time. Lockdowns in localities around the globe are being extended, but government leaders are signaling plans to reopen as they make strides in controlling the worst of the outbreaks. About 1.9 million cases have been confirmed worldwide, and the death toll has surpassed 119,500, according to Johns Hopkins University data.

The S&P 500 fell 1% today after rallying more than 12% last week. The S&P GSCI Gold index has gained 10.2% year-to-date (through April 7), highlighting gold’s haven status. The massive fiscal and monetary response by governments to manage and mitigate the financial effects of the pandemic has triggered inflationary concerns among some investors. As a hedge against inflation, gold is still viewed by many market participants as the “currency of last resort,” according to S&P Dow Jones Indices.

Roughly 78% of companies globally believe the coronavirus crisis has already hurt their business; 62% have seen a decline in employee productivity or expect to in the next three months; 34% have delayed and/or halted hiring; and 22% have delayed and/or halted the rolling out of new products or services, according to 451 Research, part of S&P Global Market Intelligence, which surveyed more than 800 technology decision-makers.

Against a backdrop of millions of furloughs and layoffs in the U.S., Amazon announced today its plan to hire 75,000 additional workers—on top of the 100,000 staff the company brought on in less than a month—to satisfy increasing demand, as well as plans to loosen purchasing and selling restrictions on non-essential goods. However, experts believe that the coronavirus could be a catalyst for Amazon and other retailers to invest millions of additional dollars in the automation of tasks otherwise performed by lower-wage workers, according to S&P Global Market Intelligence.

Today is Monday, April 13, 2020, and here is essential insight on COVID-19 and the markets.

OIL & ENERGY MARKETS

OPEC+ finalizes oil cut deal, halting a bruising price war, but coronavirus pain to linger

OPEC and its allies locked in a historic oil supply accord Sunday after Saudi Arabia, under pressure from the US, ended a four-day stalemate with Mexico that threatened to escalate a price war in the midst of the coronavirus crisis. The deal would see the 23-country OPEC+ alliance rein in 9.7 million b/d of crude oil production for May and June — down from the 10 million b/d originally envisaged, as Mexico was allowed a more generous quota.

Combined with financially forced shut-ins of wells in the US and Canada, some further output restraints by Brazil, Norway and others, and purchases of crude by various countries to fill strategic petroleum reserves, the market could see up to 20 million b/d — one-fifth of world supply — removed over the next two months, officials said, though the exact math was unclear. It is the biggest coordinated supply contraction covered by an international deal. The cuts are aimed at backstopping the market's slide, as coronavirus containment measures continue to erode global oil demand, and ending a punishing price war launched by Saudi Arabia and Russia. But they may not be enough to stabilize the market in the short-term, with many analysts projecting an oversupply of at least 20 million b/d in the coming months and a dearth of oil storage capacity.

—Read the full article from S&P Global Platts

OPEC+ production cut deemed 'insufficient' by banks

This weekend's emergency OPEC+ teleconference meeting that saw the 23-member alliance agree to slash production by almost 10 million b/d is regarded as insufficient by several large banks, who say it is unlikely to balance the market. In its analysis, Goldman Sachs said it was assuming almost full compliance on the cuts from core OPEC members and 50% from other participants, which it argued would lead to an overall cut of 4.3 million b/d from the production levels from the first quarter of 2020. An additional 4.1 million b/d in cuts would be needed to balance the market in May under this assumption, it said. The additional 3.7 million b/d of cuts pledged by the US, Canada and Brazil are likely to occur over a period of time and be due to market forces rather than voluntary cuts, it added.

—Read the full article from S&P Global Platts

OPEC+ production cuts likely not enough to balance market or help US producers

The deal, which would take at least 9.7 million barrels of oil per day off the market, was considered by many analysts to be far from enough given the dramatic drop in demand caused by the COVID-19 virus.

"The supply adjustment will be seen as insufficient against a global demand decline of as much as [approximately 20 million bbl/d] based on early April figures," Deutsche Bank said in an April 13 commentary. "This decline could only mathematically coexist with OPEC's estimate of a [approximately 12 million bbl/d] demand decline over the whole of [the second quarter of 2020] if social distancing measures are meaningfully scaled back by mid-May or June."

Bernstein Research stuck a similar tone, also calling the reductions "insufficient" in the face of the unprecedented collapse in demand. The firm also expressed skepticism that OPEC member states will stay true to their word when it comes to cutting production. The analysts said OPEC and Russia will see demand destruction of 10% to 20%, or between 1 million and 5 million bbl/d. "The fall in exports will therefore not be proportional to the cut in production," the firm said. "Compliance is a major risk. Once countries realize that oil prices are not rising on the back of production cuts, their commitment to cuts could be limited."

—Read the full article from S&P Global Market Intelligence

Oil futures: Crude retreats as OPEC+ cuts fall short of balancing market

Crude futures fell into negative territory in early trading Sunday evening, as the market sized a historic global production cut agreement against demand outlooks that have been heavily impacted by COVID-19 pandemic containment efforts. At 2223 GMT NYMEX May WTI was down 29 cents at $22.47 and ICE June Brent was 3 cents lower at $31.45/b.

—Read the full article from S&P Global Platts

PODCAST OF THE DAY

Listen: Has Trump found religion on low oil prices?

President Donald Trump once saw gasoline prices below $1/gallon one of his greatest assets in his re-election campaign, but low oil prices have pushed US shale and American energy dominance to the brink of collapse and his views have changed. On this Capitol Crude podcast, Bob McNally, president of Rapidan Energy Group, talks about the new OPEC+ agreement, the damage the price war may have had on US-Saudi relations, and where the "new normal" for global oil demand might be after global coronavirus restrictions are eased. McNally also talks about why Trump, a major fan of low gasoline prices and outspoken OPEC critic, now sees that oil prices can fall too low and why his view of the market has shifted on the fly. McNally is a former White House energy adviser and author of the book "Crude Volatility: The History and the Future of Boom-Bust Oil Prices."

—Subscribe to the Captiol Crude podcast from S&P Global Platts

Saudi Aramco slashes selling prices to Asia for second month after historic OPEC+ deal

Saudi Aramco again slashed official selling prices for its crude headed to Asia for a second consecutive month, even after marathon talks that led to the historic output cut by OPEC and other nations, according to a pricing letter seen by S&P Global Platts. Aramco set the OSP differential for its Arab Light crude headed to Asia at minus $7.30/b against the average of Dubai and Oman crude assessments over May. That's down by $4.20/b, and compares with an expected reduction of $2-$3/b, according to a Platts survey of traders.

—Read the full article from S&P Global Platts

Baker Hughes plans $15 billion impairment, citing coronavirus demand hit

Baker Hughes said Monday it will report a $15 billion impairment charge, larger than the company's current market capitalization value, as the decimated oilfield services sector adjusts to demand collapse triggered by the coronavirus pandemic. Baker Hughes said in a statement it will record the goodwill charge in the first quarter after the impacts of the pandemic led the company to perform an interim quantitative impairment test. Apart from the impairment charge, Baker Hughes also will cut its 2020 capital expenditure budget by more than 20% from last year down to less than $1 billion, it said. Baker Hughes highlighted the impairment won't impact cash flow and the company "continues to maintain solid financial strength and liquidity."

With the coronavirus pandemic causing global oil demand to plunge by at least 20 million b/d, global oilfield activity is grinding to a halt in much of the world, especially in North America. The US oil and natural gas rig count fell by 80 to 641 last week, the biggest decline in more than five years, as the industry sheds rigs and jobs and slows activity, especially from the Permian Basin, rig data provider Enverus said April 9. Baker Hughes' stock market value has plunged nearly 50% since the beginning of this year, dropping the Houston services firm down to a market capitalization value of about $13.7 billion.

—Read the full article from S&P Global Platts

First shipment of US LNG to China in more than a year nears destination

The first shipment of US LNG to be delivered to China in more than a year could arrive this week, S&P Global Platts trade flow software cFlow showed. The approaching milestone follows import tariff exemptions that China has granted. At least six tankers that loaded on the US Gulf Coast in March and early April are currently on their way to China, according to cFlow and market sources.

Even amid weak prices in end-user markets and depressed demand due to the coronavirus pandemic, utilization at the six major US liquefaction terminals remains robust, with almost 9 Bcf/d of feedgas flowing to the facilities on Monday, S&P Global Platts Analytics data showed. The resumption of Chinese deliveries will help with optionality. No US LNG has been delivered to China since March 2019, amid tariffs of 25% that Beijing imposed on American cargoes in retaliation for US duties on Chinese goods. China started to offer a limited number of exemptions on certain commodities, including LNG, after an initial trade deal between the two countries was announced in January.

—Read the full article from S&P Global Platts

India lockdown: Government pins hope on domestic thermal coal for power generation amid oversupply

Seaborne thermal coal traders were unfazed and stressed the importance of imported material in India's energy mix even as the Indian government urged end-users to keep seaborne cargoes at bay and consume domestic stockpiles amid the coronavirus pandemic. India's Coal Minister Pralhad Joshi had written to Indian states asking for refrain from importing coal, and relying instead on domestic material from Coal India Limited.

Several Indian states have opted to extend the lockdown until at least the end of the month in a bid to stop the spread of the pandemic. Last week, a total of 40 thermal power plants in India, with a combined capacity of at least 30 GW, reportedly stopped lifting coal as demand fell sharply due to the nationwide lockdown, Platts reported previously.

—Read the full article from S&P Global Platts

Coronavirus, climate policy hang over National Grid's NY gas rate case

The coronavirus pandemic and New York climate policy could influence the outcome of National Grid USA's petition for higher downstate gas rates — a proceeding that developed throughout 2019 alongside a contentious dispute with the state utility regulator.

New York City and other stakeholders in the nearly year-long rate case have recently asked the New York Public Service Commission, or PSC, to consider COVID-19's impact on ratepayers and recently passed climate law in its final decision. The PSC will already be working from a recommendation from the New York Department of Public Service, or DPS, that is unfavorable to National Grid's two downstate utilities, offering both a lower recommended return and lower recommended revenue requirements compared to what the company requested.

—Read the full article from S&P Global Market Intelligence

Global solar industry threatened by Chinese companies' cash crunch

Saddled with a massive pile of short-term debt and dwindling cash, solar-materials supplier GCL-Poly Energy Holdings Ltd. faces a potential liquidity crisis after its breach of a loan covenant triggered cross-default clauses in hundreds of millions of dollars worth of other bank borrowings, S&P Global Ratings said April 8. The Hong Kong-headquartered company, which produces the raw material polysilicon and solar wafers for module manufacturers, finished 2019 with near-term debts that were more than three times larger than its holdings of cash and short-term pledges, and it is "highly uncertain" whether it will be able to meet its obligations, S&P Global Ratings said in a note downgrading a subsidiary of GCL-Poly, power plant developer GCL New Energy Holdings Ltd.

GCL-Poly is not alone. Heading into 2020, corporate debt in China ranked as the global solar industry's biggest challenge, according to Paula Mints, chief analyst at SPV Market Research. Corporate defaults in the country's solar sector could disrupt the global solar industry, threatening demand in the world's biggest market and leading to warranty and quality issues among manufacturers, Mints has warned in recent months.

—Read the full article from S&P Global Market Intelligence

MARKET VOLATILITY

Glory or Embarrassment?

Active funds generally lagged their passive benchmarks in 2019, but the market environment in 2020 has already shifted radically. Volatility has skyrocketed as the S&P 500® and other indices have fallen. Ironically, it is precisely in a time such as this, when absolute returns are hard to come by, that relative returns might be most readily attainable. This is true not just for traditional stock pickers, but also for active managers looking to express tactical views on the business cycle through sector rotation.

S&P Dow Jones Indices analyzed the opportunities available by examining changes in dispersion among sectors and industries. The greater the level of dispersion, the more opportunity there is for active managers to display their skill in sector or industry rotation. Dispersion among S&P 500 sectors more than tripled in March 2020, and similar trends can be seen for dispersion among mid- and small-cap sectors.

—Read the full article from S&P Dow Jones Indices

Golden Eye of the Storm

Much has been made of the relative performance of gold since the start of the global COVID-19 pandemic. The S&P GSCI Gold gained 10.2% YTD through April 7, 2020, highlighting its safe-haven status; however, it is worth reviewing this performance and considering what demand drivers may influence gold prices over the coming months. The generally held belief is that gold is negatively correlated to equities during extended bear markets, but it is not unusual for gold, and other putative safe havens, to retreat in unison on big down days in the broader market. Gold’s high liquidity makes it an attractive component of a portfolio to sell in times of urgent need for cash, such as when meeting margin calls. This is what occurred in March 2020. The spike in volatility would also have forced investors to cut the overall size of risk-adjusted positions.

—Read the full article from S&P Dow Jones Indices

CHART OF THE DAY

US leveraged loan market claws back some losses after brutal March

Leveraged loans continue to bounce back from a horrendous March, with the partial rebound corresponding to improvements in the broader credit and financial markets, stemming from the first round of the Federal Reserve’s quantitative easing announcements to combat economic dislocation caused by the coronavirus pandemic.

Of particular note, the share of the $1.2 trillion in outstanding U.S. leveraged loan debt that is categorized as distressed — meaning priced at less than 80 cents on the dollar — has dropped to 20%, from a recent high of 57% last month, according to the S&P/LSTA Leveraged Loan Index. As well as the Fed actions, the loan market rebound comes as investors find value in higher-quality, better-rated speculative-grade loan issues that plummeted alongside riskier names during the March market upheaval, sources say.

—Read the full article from S&P Global Market Intelligence

Analysts downgrade chip-market projections as COVID-19 impact worsens

Semiconductor stocks that have been among the most resilient during coronavirus-inspired market upheavals are getting a reevaluation. Both Gartner Inc. and semiconductor-industry market researcher IC Insights predicted a drop in semiconductor sales for the year due to the coronavirus crisis. Gartner altered its prediction for total 2020 semiconductor revenue from 12.5% growth to a decline of 0.9%, or $415.4 billion, compared to $419.1 billion during 2019.

—Read the full article from S&P Global Market Intelligence

ECONOMIC UNCERTAINTY

Big US banks to give read on credit cycle in Q1 reports: How long, how bad

It's clear that the coronavirus pandemic has triggered a dizzying economic collapse; how long it lasts and how much damage it leaves behind remain uncertain. Those are key variables in determining whether a potential wave of missed borrower payments will convert into massive charge-offs for banks in the coming months, which could jeopardize dividends and even create the need for additional capital. Analysts and investors will be watching first-quarter earnings reports closely for information on how much money banks are setting aside for credit losses and early loan forbearance figures to gain insight into how the downturn might play out.

Although banks do not have to record coronavirus-related breaks they give to borrowers as delinquencies or troubled debt restructurings, analysts widely expect sharp increases in credit loss expenses. Front-loaded provisions required under new accounting rules could combine with revenues compressed by low interest rates to hammer first-quarter results, and some analysts are projecting losses at large banks for the full year.

—Read the full article from S&P Global Market Intelligence

Nearly 30 US banks announce share buybacks since March 1 amid stock sell-off

While the largest U.S. banks have suspended share repurchases in preparation for a likely recession, several community banks saw opportunity to launch new buyback programs during March's sell-off. In total, 29 banks announced new share repurchase plans between March 1 and April 7, according to S&P Global Market Intelligence data; one of those banks suspended its plan shortly after the announcement. That includes eight banks that unveiled plans after March 15, when the eight U.S.-based global systemically important banks said they would temporarily pause share repurchases until the second half of the year due to the COVID-19 pandemic.

Shareholder distributions have become a topic of heated debate as the economy appears headed for a recession, with widespread stay-at-home orders shuttering local businesses and sending nearly 17 million Americans to file for unemployment over the last three weeks. While banks have built robust capital buffers in recent years, several prominent voices have called for a suspension of share buybacks and dividends.

—Read the full article from S&P Global Market Intelligence

Coronavirus could spark demand for e-wallets, digital banks in LatAm

The coronavirus outbreak could drive financial inclusion in Latin America, as governments look for agile partners to distribute state aid and large segments of the informal economy grapple with restricted access to cash. Digital banks and e-wallets could see an uptick in overall demand in different countries as quarantine and social distancing measures are rapidly turning digital transactions into a necessity in a region with a longstanding preference for cash, and where nearly half the population is unbanked.

—Read the full article from S&P Global Market Intelligence

Coronavirus Quick Fixes aren't Scalable; Business Leaders Must Rethink Work Itself

The data from our Voice of the Enterprise: Digital Pulse, Coronavirus Flash Survey March 2020, which we conducted with over 800 technology decision-makers, paints an extraordinary picture: 78% of businesses believe it's already had a negative operational impact, 88% are spending less on business travel, 62% have already experienced a fall in employee productivity or expect to in the next three months, 41% report having already felt an internal strain on their IT resources, 34% have delayed/halted strategic hiring plans and 22% the rolling out of new products or services, and a net 10% of companies are spending less on labor.

And this is what currently looks like only the start of the crisis. The rapidly changing circumstances even showed over the two-week period we fielded our survey. Over that short period, the proportion of businesses reporting falling customer demand, IT strain, productivity drop-offs and reductions in materials supply almost doubled. There may be worse to come – 8% of businesses already report experiencing a major business disruption, such as losing a major client or defaulting on debt obligations. If the crisis continues in its current state, 31% won't last more than three months before they also suffer such a disruption, rising to 52% within six months. Many businesses are in highly precarious situations.

—Read the full article from S&P Global Market Intelligence

The pandemic 'wake up call' and selling life insurance while social distancing

While technology is vital to the life insurance application process, many potential customers do not know enough to buy policies online. The life insurance industry could do more to make it easier for independent agencies to sell their products.

Erin Ardleigh thinks the COVID-19 pandemic provides an opportunity for people without life insurance to think about buying policies, and she has marketed virtual applications to address that need while society is social distancing. Ardleigh's path to ownership of New York-based Dynama Insurance is unique in that she began in marketing. Ardleigh recently spoke with S&P Global Market Intelligence about the rewards and challenges of selling as an independent broker, the promise and limitations of technology and other topics.

—Read the full interview from S&P Global Market Intelligence

Medicaid enrollment may surge as pandemic takes toll on US economy

As the coronavirus pandemic upends the U.S. economy, the Medicaid health insurance program for people with low incomes could see a significant increase in enrollment and become a crucial part of the country's response to the crisis. The U.S. saw over 16 million jobless claims as the pandemic intensified during March and April, and the unemployment rate increased from 3.5% to 4.4% last month, the single largest one-month jump since January 1975.

While it is too early to project exact numbers, Medicaid enrollment will rise over the coming months as people who have lost jobs turn to the program for health insurance coverage, Robin Rudowitz, co-director of the program on Medicaid and the uninsured for the Kaiser Family Foundation, a nonpartisan health policy organization, said in an interview with S&P Global Market Intelligence. Medicaid enrollment should increase substantially due to the effects of the pandemic, providing individuals and families with a "lifeline ... as they face what's going on today," said Edwin Park, a research professor at Georgetown University's McCourt School of Public Policy.

—Read the full article from S&P Global Market Intelligence

Coronavirus crisis could prompt Amazon, other retailers to invest in automation

Amazon.com Inc. and other e-commerce retailers are likely to invest more in automation as a result of the coronavirus pandemic, a move experts say would allow the companies to further reduce reliance on human labor and better handle shocks to their supply chains in the coming years. Retailers including Amazon, Walmart Inc. and The Kroger Co. have already invested in technology tools ahead of the virus outbreak to increase efficiencies within their physical stores and warehouses, such as systems for picking customer orders, tracking inventory and automating grocery delivery.

But experts believe that the outbreak, which caused massive supply chain disruptions and led to worker backlash over a lack of safety supplies, could be a catalyst for millions of additional dollars in automation and robotics capabilities that automate tedious tasks otherwise performed by low-wage workers.Increased adoption of robotics will give retailers more consistency and control in their supply chains, which have experienced bottlenecks due to soaring demand for online goods. On the flip side, those investments, over time, are likely to threaten millions of U.S. jobs, including positions susceptible to automation in transportation and food preparation.

—Read the full article from S&P Global Market Intelligence

Virus, Oil, And Volatility Will Put Sukuk Issuance Into Reverse

S&P Global Ratings believes the sukuk market will see a significant reduction in issuance volumes in 2020. The drop in oil prices and restrictions related to the COVID-19 pandemic will take a toll on important sectors in core Islamic finance countries, including real estate, hospitality, and consumer-related businesses. What's more, government measures will result in lower issuance from both corporate entities and central banks. In addition, S&P Global Ratings believes most government issuers may turn to conventional bond markets rather than issue sukuk as they grapple with the impact of weaker economic environment on their budgets. Sukuk issuance is still more complex than for conventional bonds. Added to this is investors' increasing risk aversion in the uncertain environment and widening spreads, which imply that financing conditions will be extremely tight for issuers with weak credit quality.

—Read the full report from S&P Global Ratings

U.S. Commercial Small-Ticket ABS Will Be First In Sector To Feel Impact Of COVID-19

S&P Global Ratings expects COVID-19 to initially affect certain segments of the U.S. commercial asset-backed securities (ABS) sector more so than others. The commercial ABS sector encompasses a wide variety of industry and equipment types and servicers, ranging from small-ticket independent lessors to larger-dollar captive financing companies. S&P Global Ratings believes that ABS transactions originated by small-independent finance companies, regardless of specific equipment type—especially those with exposure to "nonessential" small businesses (e.g., the restaurant and hospitality industries)—are most at risk of immediately experiencing elevated levels of deferrals, delinquencies, and losses.

—Read the full report from S&P Global Ratings

COVID-19: Coronavirus-Related Public Rating Actions On Nonfinancial Corporations And Affected European CLOs

In response to investors' growing interest in the COVID-19 coronavirus and its credit effects on companies and European collateralized loan obligations (CLOs), S&P Global Ratings is publishing a regularly updated list of rating actions taken globally on nonfinancial corporations, which have had an effect on European CLOs, and a summary table. These are public ratings where S&P Global Ratings mentions the COVID-19 coronavirus as one factor or in combination with others.

—Read the full report from S&P Global Ratings

Written and compiled by Molly Mintz.