-Green shoots do little to explain demand destruction
-Toxic US climate will get worse before it gets better.
The price for Brent crude was in negative territory early Tuesday, erasing much of the gains from the previous session. Headline issues were largely centered on an announcement from British supermajor BP that it was making a sharp pivot toward a more sustainable future. But beneath the fold were warnings about the road ahead. With the United Kingdom on the cusp of a second wave of a stubborn pandemic, the company said it expected the global economy to contract and take demand with it. In trade, the lack of compliance in the Sino-American trade deal highlights the ever-souring bilateral relations between the two superpowers. And the United States continues to have problems of its own, with an estimated 19 million people losing a vital economic lifeline.
The price for Brent crude oil was on pace to erase a near-2% gain in the previous session. The global benchmark for the price of oil was down some 1.7% as of 8 a.m. ET to trade at $43.41 per barrel. Day-to-day swings have been enough to leave Brent largely range-bound, with a $43 per barrel floor in place since July 2.
BP joined the crowded field of big oil companies looking toward a greener future. The company on Tuesday reported a massive $6.7 billion loss in the second quarter and cut its dividend for the first time in a decade. In a statement that sounded more like an excuse than an explanation, CEO Bernard Looney chalked up the loss in part to “the deliberate steps we have taken as we continue to re-imagine energy and reinvent BP.”
The company touted a sustainable strategy that included a ten-fold increase in spending on low-carbon options by 2030. Chairman Helge Lund, carrying over his green ambitions from his tenure at Equinor, said BP has adopted a “net-zero ambition” for the future. Among the highlights were liquefied natural gas arrangements with China’s ENN and Spain’s Enagas. Elsewhere in China, the company said it was working with Chinese solar energy company JinkoPower and planned $70 million in investments in India’s renewable energy sector.
But a green initiative for the future does little to explain the massive loss for the mighty might BP. With most major economies in severe contraction, the company said it expected “challenging and uncertain” times ahead for commodity prices and product demand. Global demand for oil is expected to be at least 8 million barrels per day less than last year, stock levels for members of the OECD are well above the five-year average, the gas market is clearly oversupplied and the pandemic is certain to crimp demand. According to BP, the global economy may shrink by as much as 5% this year.
The global economy was already on pace for a contraction last year, with the financial press seizing the moment on yield curve inversions in the fourth quarter. A bruising trade war between the United States and China was expected to shave some 1% off global GDP. The pandemic obviously made that worse, and the level of toxicity between the two superpowers has only been elevated since the signing of a Phase 1 trade deal. US President Trump has embraced a decidedly xenophobic foreign policy, labeling the novel coronavirus the China virus. Through that lens, China’s skirting of its commitments to the trade deal looks retaliatory. The president spent much of last week declaring his strategy of energy dominance was paying off. But, according to calculations from the Reuters news agency, China has spent only $1.29 billion so far this year on US liquefied natural gas, crude oil and other energy products this year. Under the terms of the Phase 1 trade agreement, it was supposed to spend some $25.3 billion on US energy products during the first half of the year. That is clearly not a success story for this administration.
President Trump was widely ridiculed on social media Tuesday morning for his performance during an interview with the Axios news service. An administration that bases much of its policy announcements on fear and anger has left the civil and political culture sharply divided. Those divisions have handicapped lawmakers on Capitol Hill. Big budget wish lists that have little to do with propping up US taxpayers off the payroll are pivotal issues in another round of stimulus. Republican lawmakers tried to play the clock on a low-ball offer, while Democrats refused to accept a short-term extension. The US economy is coming off a massive decline in the second quarter. And while a repeat of that contraction is unlikely, the toxic climate in the United States is likely to get worse before it gets better.