Saudi Arabia and Russia are facing off in a price war right in the midst of coronavirus and things are moving fast. All that and more in The Morning Shift for Monday, March 9, 2020.
1st Gear: OPEC And Russia Are In A Price War
This is a multi-part story that will take a moment to explain but here are the key pieces to it.
The first thing to note is that we are in the midst of an already, er, volatile time thanks to coronavirus. Everything that I’m about to get into would not be causing the financial effects already underway if we weren’t already facing industrial shutdowns and consumer panics. But we’ll get back to that.
The price of oil has slumped harder than any time since 1991 and the Gulf War, as Bloomberg reports:
Oil prices plunged after the dramatic breakdown of talks between OPEC and Russia prompted Saudi Arabia to launch a price war. Brent crude tumbled by almost a third to $31 a barrel on Monday, as Goldman Sachs Group Inc. told clients it could quickly dip into the $20s.
This is all part of a price war between OPEC and Russia, one that we can expect to hurt America’s economy, per Bloomberg:
The crisis was precipitated when Russia refused to yield to a Saudi-led gamble to force Moscow to join OPEC in production cuts. OPEC presented a take-it-or-leave-it plan to slash production and throw a floor under prices. But Russia had another idea: its strategy was to squeeze American shale producers, which have flooded the market in recent years as OPEC+ nations held back their own production.
The stock market has not taken this well, with Barron’s referring to it as “tumbling” and “in free fall” in one article alone. The Guardian called it a “panic,” noting that the last time things were as bad as they look to be was 2008. Not great!
Last night, futures were halted on the S&P 500 after they fell 5 percent in four hours, as Barron’s notes.
Coronavirus is playing a big part in this, as Bloomberg notes in its article “Oil Crash Sends New Shock Through World Crippled by Virus:”
The U.S. — once a winner from low oil — is now an exporter rather than a buyer. And the hit to economic demand from the virus dulls the impact of any stimulus that cheap oil might provide. Oil shocks — on the way up — used to be feared for their impact on inflation. Now in a world where central bankers desperately pursue price growth, the opposite dynamic is at play.
“Lower oil prices will still not get people back in trains, planes, and automobiles, and stimulating the economic sectors most heavily hit,” said Stephen Innes, chief Asia market strategist with Axicorp Ltd. “But now we have a financial disaster brewing in the form of the shale industry meltdown.”
Today, the fear is that we’ll see even worse declines, and in the coming hours we may hit what are called “circuit breakers,” automatic tripwires that pause trading for minutes, hours, or even the full day.
Indeed, in the time that it took to write this article, we tripped the first of these circuit breakers at 7 percent, as the Associated Press reports:
Global stock markets and oil prices plunged Monday after a fight among major crude-producing nations jolted investors who already were on edge about the surging costs of a virus outbreak.
The main stock indexes in Britain and Germany were down by almost 7%. Japan’s benchmark closed down 5.1% while Australia’s lost 7.3% and the Shanghai market in China was off 3%.Trading in Wall Street futures was halted for this first time since the 2016 U.S. presidential election after they fell more than the daily limit of 5%. Bond yields hit new lows as investors bought them up as safe havens.
Barron’s has a guide to these circuit breakers—the next one is at 13 percent—and what to watch for today here.
2nd Gear: Incentives Are Out Of Control Right Now
Here is a funny one by contrast. Car sales in the U.S. did better than you’d think in February, in part because of the leap day, but also because of record-setting incentives, as Automotive News reports:
While the extra selling days were a calendar blip, higher incentives appear to have much greater staying power.“Incentives are crazy right now,” said Tyson Jominy, vice president of data and analytics at J.D. Power. “We are seeing Labor Day-like deals in February.”Indeed, J.D. Power and LMC Automotive said average industry incentives in February were tracking at $4,179 per vehicle — a $293 increase over the year before, the highest level ever recorded for February and on pace to reach as high as $5,000 per vehicle by the end of the year. ALG estimated average February incentives at $3,576, up only slightly.
I am getting flashbacks to the Recession. Great. Cool.
3rd Gear: Driverless Vehicle Demand Spikes In China Amid Coronavirus
The coronavirus has an unexpected beneficiary: the world of driverless car startups. At least one in China has seen a spike in demand as people avoid all human contact, as Automotive News China reports:
Amid the virus anxiety that has disrupted businesses and supply chains, China’s push into autonomous transport and the future of delivery is getting an unexpected boost. Neolix’s small vans help customers reduce physical contact and address labor shortages caused by lingering quarantines and travel restrictions.
Neolix’s inventories have been depleted during the epidemic as its vehicles have been used to deliver medical supplies in hospitals, including in Wuhan, at the outbreak’s epicenter. Its vans are also being used to help disinfect streets and move food to people who are working on the front lines to curb the spread of the virus, Yu said.
“Demand has been surging since the virus outbreak and more importantly, people’s perception toward driverless delivery had a complete 180-degree shift,” Yu said. “People realize that such vehicles can get things done when it is risky for a human being to do so.”
One man’s potential global pandemic is another man’s business opportunity, I guess.
4th Gear: Coronavirus Could Cut One Third Of Nissan’s Profits
The more immediate effects of stuttering production shutdowns in China and consumer panic in the car world have been cuts in sales and profits. How bad? Well, let’s take Nissan as an example, from the Financial Times:
Nissan, in particular, faces one of the biggest threats from the coronavirus outbreak among the global car groups because of its heavy reliance on hundreds of components made in China.
With sales in the US and elsewhere collapsing, China contributed as much as 70 per cent of the Japanese group’s operating profits and 30 per cent of its vehicle sales between April and December.
Citigroup has warned that the coronavirus-related sales drop in China could wipe 35 per cent off Nissan’s net profit in the 2020-21 financial year if its car plants in four locations — three of which near the centre of the outbreak in Hubei province remain mothballed since February — are not fully restored for two months.
Time will tell if Nissan is an exceptional case in the car world, or if we’ll soon be hearing similar language from all major automakers.
5th Gear: EU Hits At Least Fifth New Strategy On Hydrogen
I remember visiting the Fuel Cell Partnership in West Sacramento what must have been 20 years ago. Now, the EU is getting in on that hot hydrogen action, as the Financial Times reports:
Europe will this week announce plans for a new EU-wide partnership to develop clean hydrogen fuel technologies, as Brussels seeks ways to accelerate its push towards carbon neutrality.
Plans for a “clean hydrogen” alliance will be unveiled on Tuesday alongside a new industrial strategy for Europe, officials said, following the precedent set by last year’s advanced battery technology alliance, which was cleared to receive €3.2bn in public support.
[…]
The latest industrial strategy, which is at least the fifth such initiative from Brussels since 2005, comes as companies across Europe push for a new approach in light of huge technological change and increasing geopolitical volatility.
I’m sure that this hydrogen thing will work now for sure.
Reverse: And Our Highways Have Been Perfect Ever Since
Neutral: What Are Your Memories Of ‘91
I have very strong memories of the Great Recession, but I was just a kid in 1991. Were you a car buyer then? How do you remember those days of war and recession?