Fed Takes Emergency Action
March 16, 2020
Things in this world are continuing to get very interesting and all of us are dealing with some unprecedented time in my opinion. The Federal Reserve in a very surprising announcement on a Sunday took emergency action and cut the benchmark interest rate another 100 basis points to bring it to essentially zero. They also are adding a $700 billion quantitative easing program. This was seen as a positive step but so far, the market reaction has not been positive. Energy markets are down hard in overnight and early trading. The fear that seems to grow as coronavirus spreads is taking a huge toll on the economy, the economic outlook and most all markets. The worse of coronavirus is not here yet. As more test kits get distributed in the US, which was supposed to begin this weekend, the number of cases will go up. There are many that seem to think we have not done enough here in the US and the point to how rapidly things escalated in Italy as the example. It is very likely that more schools and businesses will close which may be a positive to stop the spread of the virus but is not a positive for the economy and energy demand.
Here are some of the hard facts that energy is having to deal with as the coronavirus beats down demand and Russia and Saudi Arabia engage in a price war that has them trying to produce oil at record levels and flood the market with supply. Energy analysts now estimate the world oil demand loss by the coronavirus is approximately 3 million bpd. On the supply side, the OPEC and Russia oil cut agreement falling apart will add 3.2 million bpd starting in April 1 back into the market. The combined demand loss and supply rise is as much as 6 million bpd added to world oil supplies.
US crude oil exports are expected to fall by about 1 million bpd in April and May, as Saudi Arabia floods the market with discounted oil.
Trading sources stated that Saudi Arabia is flooding Europe with oil at price as low as $25 per barrels, specifically targeting big refiners of Russian oil. The sources, four oil majors and refiners which process crude oil in Europe, said Saudi Aramco told them it would supply all requests additional volumes in April.
Oil analytics firm Vortexa said global observed crude and condensate in floating storage increased to about 70 million barrels at the beginning of this week. It said 26 million barrels of the total observed floating crude inventory as of March 11th were in Asia, 40% of which is floating near China Jiangsu province.
Delta Air Lines, American Air Lines and United are in talks with the US government about potential assistance amid a dramatic decline in air travel due to the coronavirus outbreak.
Baker Hughes reported that the number of rigs searching for oil increased by 1 to 683 in the week ending March 13th. US shale oil firms are being reported as under hedged for their current 2020 production. Many are at risk below $45 dollars on WTI crude oil which is current trading at $29.74. US shale will fill the impacts of this current market fall out. US production will decline.