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Markets Rebound While Oil Price War Remains

By Jeroen Posma | Tue, 03/10/2020 - 16:55

The morning after the Dow Jones Industrial Average had its worst day since 2008, falling more than 2,000 points accompanied by the biggest oil price crash since 1991, the US’ main index opened 800 points higher. After markets in Asia and Europe staged a recovery on Tuesday, the Dow Jones Industrial Average opened up 3.3%, the S&P 500 was up 2.9% and the Nasdaq rose by 2.7%. By late morning these initial gains partially evaporated as the underlying impact of the coronavirus and the implications of oil at US$33 per barrel remain unchanged, but an afternoon rally enabled the Dow to close 4.89% up. To ease the pain caused to the American economy, President Trump announced that he will unveil “dramatic” measures including a payroll tax cut, financial support for workers who not receive paid sick leave, and more stimulus to support  sectors such as tourism sector, where cruise lines, airlines and hotels are particularly affected.

Mexico’s stock exchange recorded a 2% gain in afternoon trading, despite the absence of support measures from the Mexican government. The Mexican Peso also recovered from yesterday’s close of MX$21.17 to trade around MX$20.80 during the day.

Saudi Aramco announced its objective of bringing 12.3 million barrels per day to market in April, which is 300 thousand barrels per day beyond the company’s sustained capacity and more than 2.6 million barrels per day more than its oil production level of recent months. Russia’s announcement to also boost production is a strong indication that the oil price war is here to stay. Nevertheless, oil companies saw their share prices recover modestly after yesterday’s steep drops. Among oil companies with a presence in Mexico, Fieldwood was the big winner, seeing its shareprice soar by 20%, while ENI up 8%, Shell up 7%, BP up 6%, Talos Energy up 4% and ExxonMobil was up 3%. Oilfield service providers Schlumberger and Halliburton also benefited from the rebound and saw their share prices increase by respectively 5% up 6%.

Nansen G. Saleri, Chairman, CEO and co-founder of QRI, as well as the former Head of Reservoir Management for Saudi Aramco and an opinion leader in the oil and gas industry, shared his perspective on the latest industry developments. “Unquestionably there is huge competition to gain market share in the global energy market. What has happened over the last days is a direct expression of that competition and what I see is a huge market overreaction related to Coronavirus. I do not think an oil price of US$20-30 per barrel is sustainable because the world needs energy. Nowadays, the world needs between 95 and 99 million barrels a day, so I expect the markets to self-correct.

“The Coronavirus has a direct impact on global demand and oil prices, but I think that with all countries working together and WHO leading the way we can manage the situation. I do not want to underestimate this huge threat to the global economy, but I am confident that over the next 60 and 180 days there will be sufficient answers to manage the crisis. I am optimistic that the global efforts and the benefits of modern technologies will enable the world to overcome the Coronavirus problem and the associated challenges impacting crude oil prices,” concluded Nansen G. Saleri.

The Mexican crude oil basket price closed at US$24.43 per barrel yesterday, down from US$35.75 on Friday, so Mexico’s national oil company PEMEX will not be eager to wait 60 to 180 days for oil prices to recover as it already faces production, cost and financing challenges. Mexico’s President Lopez Obrador made the “rescue of PEMEX” the cornerstone of his administration, a project that becomes increasingly challenging as financial pressure on the company is mounting and the rating downgrades are rapidly becoming a real threat in the current oil price environment. While the oil price crash makes it virtually impossible for PEMEX to turn a profit this year, the company is unlikely to adjust its investment plans. President López Obrador’ determination to rescue PEMEX is predominantly measured in production volume, so investments in its shallow water and onshore fields are at this moment unlikely to be affected.

Cutting costs, refocusing on the most profitable fields, new oil discoveries, and inviting or at least protecting international investment in the oil industry could mitigate that risk, but the government has yet to set a clear direction to maneuver PEMEX and its public finances through these turbulent times.

While he did not focus on the impact of the drop in oil prices on PEMEX during his morning press conference, President López Obrador said the Mexican Peso showed resistance and that there is a stabilization fund totaling US$184 billion dollars to provide an additional shield. “Yesterday was a bad day, the whole financial system fell, all the currencies depreciated but ours endured,” he stated.

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Jeroen Posma Jeroen Posma Managing Director