The Energy Report: Fatal Contraction

Stocks and oil plummeted yesterday as Treasury Secretary Steve Mnuchin warned of what can only be called a fatal contraction. Reports say that the Treasury secretary cautioned that if the U.S. government did not step in, the U.S. employment rate could soar to almost 20%. That may be a sales pitch, to sell the Trump Administrations one trillion-dollar plan that includes putting money directly into the hands of Americans in the form of a check but also cash to small businesses and the airline industry.

There's no talk of direct help for the
Energy sector other than the previously announced purchase for the Strategic Petroleum Reserve. The plan also reopens and will allow corporations to delay tax payments of up to $10 million while individuals up to $1 million to keep money in the system for small and large businesses to operate. The Fed also reopened its buying of the commercial paper facility so that banks will lend money to midsize companies.

Still, the warning that employment could rocket if these measures are not adopted rocked confidence. That warning, along with more concerns about physical and emotional demand destruction, sent shockwaves through the marketplace.

In the energy sector, ground zero for the bulk of this demand destruction shuttered as the news kept getting worse. Despite a letter to Saudi Arabia by some members of Congress, the oil price war goes on.

MES reported that 13 Republican senators sent a letter urging Saudi Arabia's Mohammed bin Salman to reverse a decision to increase oil production, saying it contributed to a disruption in oil prices "on top of already hard-hit financial markets." The letter, sent to the powerful crown prince on Monday, said, "the added impact of unsettled global energy markets is an unwelcome development" at a time when the world is battling the COVID-19 pandemic.

"Senior Saudi government leaders have repeatedly told American officials, including us, that the Kingdom of Saudi Arabia is a force for stability in global markets. Recent Saudi actions have called this role into question," the letter read. It was signed by key legislators, including Lisa Murkowski, chair of the Senate Committee on Energy and Natural Resources.

Yet Saudi Arabia says they are going to raise their oil exports by 40% to 10 million barrels a day. Iraq is calling for and almost begging for an emergency OPEC Plus meeting. The Saudi's and the Russian's oblivious to the global economic risk factors continue in their race to drive oil to zero against a backdrop of historic drops in energy demand. It seems like they are on a suicide mission to see whose economy they can destroy first.

We know that U.S. shale is taking a hit. There are reports that Halliburton (NYSE:HAL) is going to announce unpaid layoffs to many of its workers. The sad part about this is we know that this price drop and cap x cuts will lead to thousands of job losses in the industry. Even U.S. auto production will take a significant hit. The Hill reported that "Major automakers to 'review and implement' rotating partial shutdown, union says." Three of America's largest automakers have agreed to institute a rotating partial shutdown of production facilities amid the coronavirus outbreak, the United Auto Workers (UAW) union said.

The union announced it had reached a deal with General Motors (NYSE:GM), Ford Motor (NYSE:F) and Fiat Chrysler (NYSE:FCAU) for the companies to "review and implement" a rotating partial shutdown of facilities, deep cleaning of facilities and other measures to prevent the spread of the virus among workers.

Gasoline demand is tanking as streets in major cities are almost empty. U.S. refiners are moving to cut runs in response to demand losses and poetical backing up crude. According to a report released from the American Petroleum Institute (API), that may already be showing up in supply. The API reported a massive 7.834 million barrel drop in crude supply as well as a significant -3.625 million barrel drop in the distillate. Surprisingly, crude supply dipped as well, down 421,000 barrels but Cushing up 660,000 barrels.

While the worst might not be over just yet, there are signs that there is an end game. Reports say that monitor China traffic is seeing marked increases. That means we will see a rebound in a few months.

The U.S. banking system is on solid ground with large capital reserve ratios and is prepared. If you are living check to check, contact your lender and landlord for help. Communication with them is critical. Remember, we will get through this with a little faith, prayer, and good old fashion American ingenuity and sprit.

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