The GERM Report

-The “P” work strikes again

-We could be in for a rough financial winter  

Crude oil prices were moving into negative territory early in the Thursday session in response to another wave of furloughs and a messy British divorce from the European Union. As expected, oil prices bounced higher after reports of another drain on US commercial crude oil inventories. Prices tried but failed to hold to the peaks from mid-September, however. More talk of peak oil, meanwhile, put sour tones on commodities. In the Middle East, there are concerns about a resurgent Islamic State in Iraq, just as the United States threatens to close its embassy in Baghdad. And in the gas wars, Denmark agreed to let Russian natural gas flow through its territorial waters by way of the second string of the Nord Stream pipeline.

Brent crude oil trading in the December contract was down some 1.5% as of 8 a.m. ET to hit $41.68 per barrel. Brent chart patterns show the global benchmark testing late September levels of around $42, albeit unsuccessfully, though that’s starting to look like something of a consensus band for the commodity.

We noted yesterday the wave of layoffs hitting the petroleum sector. Demand destruction during the pandemic makes the $60 per barrel mark from January look like a utopian boom cycle. Apart from oil, the pandemic has eaten into demand for refined products. That’s especially the case for jet fuel, which is so cheap now that refiners are using it as a blendstock. With travel severely limited by the pandemic, Fitch Ratings on Wednesday downgraded American Airlines from B to B-, saying air travel will likely be subdued for the next several years. According to Fitch, the airline was burning through cash at a rate of $30 million per day at the end of June. A bailout for the airline industry is on the table as part of a broader rescue package for the US economy, but we see the odds as slim that bipartisanship will push this over the finish line this close to the election. If the bill lands on the president’s desk, he’ll hijack the narrative and declare an economic victory, something his opponents should be careful to avoid. Sensing the bleak prospects, American Airlines and its counterpart United announced layoffs of upwards of 32,000 employees from Thursday. Those 32,000 people spend money, and with little relief in sight just before the start of the holiday shopping season, things could get worse before they get better. Total layoffs for the week ending Sept. 26 showed gains, but drilling deeper and we see consumer spending and personal incomes taking a hit in the US economy.

In its latest report, global outplacement firm Challenger, Gray & Christmas in a report e-mailed to The GERM Report found that job cuts in the US economy last month were 2.6% higher than in August and a staggering 186% higher than last September. Andrew Challenger, a senior vice president at the firm, said that even though things have improved since the early depths of the pandemic, job cuts are still at record levels.

“These are uncertain times for everyone, as many states are experiencing an uptick in the number of COVID-19 cases,” he said in a statement. “It is clear we still have a long way to go before many industries can return to normal.”

On the other side of the Atlantic, the United Kingdom could face legal backlash for violating its own divorce agreement with the European Union. By trying to protect internal trade mechanisms with the likes of Scotland and Northern Ireland, the British government has jeopardized external relations with the continental economy. With a rough road ahead, firms are shifting payrolls and capital out of the British economy to the tune of 7,500 and $1.6 trillion, respectively. It’s not all that rosy in the European economy either. European Central Bank Vice President Luis de Guindos told Market News International that governments were forced with making the uncomfortable decision of easing lockdowns to improve economic health while at the same time endangering public health during the pandemic.

“It seems we are entering the second wave of infections, but perhaps governments have understood that a lockdown as pervasive as the one we had some months ago would be a total disaster for the economy,” he said. “So governments are trying to combine the public health element of the pandemic with keeping economies open.”

There may be more fundamental aspects at play too given the lower-for-longer expectations for the price of oil. The slump in oil prices has lent support to the so-called energy transition, with companies from Royal Dutch Shell to BP streamlining operations, and cutting jobs, for a greener future. Speaking to S&P Global Platts, Hugo De Stoop, the head of crude oil tanker giant Euronav, said oil demand might never return to pre-pandemic levels.

“We believe that we’re going to reach peak oil relatively soon, certainly in this decade. But from there on, the decline will be very gradual,” he said. “The world will continue to need oil in order to transition to a world that can be less dependent on it.”

But we’re not yet at peak oil, and we continue to believe that forecast is misguided. We’ll see how committed big energy companies are to the energy transition when oil prices eventually return to $50 per barrel or higher. That means geopolitical risk will remain a factor for the foreseeable future. Supplies could be under threat from the myriad of issues at play in Iraq, a major global producer. The United States, seeing its embassy under increasing attacks in Iraq, has threatened to close down its diplomatic outpost in Baghdad. That would open the door for an increased influence from adversaries such as Iran given the Sunni-Shiite split in Iraqi politics. US foreign policy under President Donald Trump has left the dirty work largely to others, ceding some ground on the international stage. Case in point about the diminishing influence of the United States is the advancement of the second string of the Nord Stream natural gas pipeline. Seen initially as a boost to European energy security because it avoids conflict-prone Ukraine, the artery is now seen as a threat to US interests given the rise of exports of the super-cooled form of natural gas from the United States. US concerns have been increasingly ignored, however. The pipeline is about 100 miles away from completion and parties are lining up to take part. Denmark on Thursday announced it would allow Russian gas to move through the section of Nord Stream running through its territorial waters.