The GERM Report

Risk level: Red

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

-The pandemic is in the driver’s seat

-‘No alternative’ but to lock down tight.

A 10% rally for the price of oil last week on the back of vaccine hopes overshadowed the obvious signs of a frightening uptick in new cases of COVID-19. The situation is particularly dire in the United States, where the politicization of the pandemic leaves large segments of the population exposed to risk. But it’s not just a US problem, though post-election unease would certainly make you believe that. In Europe, the demand destruction is real. All this will certainly weigh the minds of the architects of OPEC restraint, and they may need to consider further belt-tightening.

Even discounting the Nov. 9 bounce in commodities, it still would’ve been an upbeat week for the price of oil. But by the end of the week, the vaccine honeymoon was winding down and that trend may continue into this week. Brent finished trading during the week ending Nov. 13 up some 8.4% to $42.78 per barrel, in line with our Red alert from last week.

New Mexico’s Gov. Michell Lujan Grisham, a Democrat, issued a two-week stay-at-home order to protect constituents against the uptick on COVID-19 cases.

“We are in a life-or-death situation, and if we don’t act right now, we cannot preserve the lives, we can’t keep saving lives, and we will absolutely crush our current health care system and infrastructure,” she said in a statement.

Oregon’s governor issued similar restrictions. Arizona during the weekend reported some 3,400 new cases of COVID-19. Oregon is in the low 1,000s. In the Midwest, among the epicenters of the latest outbreak, cases are nearly triple that level. Illinois topped 11,000 and Michigan is reporting around 8,000 new cases. In Michigan, where the divide between Red and Blue carries with it a domestic terrorism threat, the governor is limited in what she can do because of partisan opposition. On the same week that a state Republican senator tested positive for COVID-19. Michigan Gov. Gretchen Whitmer said she was hopeful her colleagues in the GOP would support efforts to control the outbreak.

“However, they have not shown any appetite for that, or, frankly, for anything else,” she said. “In fact, they’re not in session this week until December.”

On Sunday, the state’s health department imposed a soft three-week lockdown.

President-elect Joe Biden’s team was cautious about saying it would mandate nation-wide restrictions. That doesn’t do much for today though, and President Donald Trump in his most recent marks suggested it was not his responsibility to issue public health mandates. That leaves the United States more or less rudderless in the effort to control the pandemic. The nation with the second-highest level of new infections, meanwhile, is India, with just 41,000 new cases reported as of Sunday. The United States reported 166,555 new cases.

Health is just one of the concerns facing the world’s largest economy. Republicans continue to support a $500 billion stimulus package, while Democrats want something closer to $2 trillion. The partisan bickering leaves many U.S. taxpayers scrambling to make ends meet. With work-from-home becoming the new normal, that leaves non-tech sectors vulnerable. A report from Deloitte last year found IT was among the largest drivers of growth. That segment can remain prosperous in the work-from-home environment, but recreation, manufacturing and other components aren’t so lucky. And let’s not forget janitors, cafeteria workers and the like, whose job depends on an office that might not open for another few months. This is, however, a global issue.

“The demand pullback in Europe is frightening,” Bob McNally, president of consultant Rapidan, told Bloomberg news during the weekend.

Though taking a harder line than most, Austrian Chancellor Sebastian Kurz during the weekend ordered non-essential businesses to close through early December. Lockdowns, he said, are the only thing that works.

“There is no alternative,” he said.

That’s likely to offset recovery in the Asian economies. Seasonal issues would already be a factor at this point in the year, until holiday travel factors into the demand equation. But we likely won’t have a holiday travel season this year. Mobility data in major European cities like Paris are lower than October, but the degree of decline is troubling.

“For now, we expect roughly a drop in European oil demand of around one million barrels per day (bpd) month-on-month in November, where approximately 80% of this drop can be attributed to the lockdown impact and the rest to monthly seasonality,” Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said last week.

That leaves OPEC with some tough thinking to do. It would be an obvious mistake to move ahead with a relaxation of curtailments in January. Does OPEC need to do more, or should the market take care of itself? Market management until a vaccine emerges may be largely guesswork at this point given the hodge-podge of global restrictions. As with long-term projections for the price of oil, betting on what happens tomorrow is anyone’s guess at this point. Adding to the problem now is violence. US President Donald Trump continues to say the Nov. 3 election was a fraudulent one, and his most ardent supporters believe him. Protests during the weekend turned violent and, if the situation continues to escalate, we may have more problems than we can handle.

Japan on Sunday reported a strong reading for third quarter GDP, though like the rest of the world, that momentum won’t continue. We have a handful of speeches from European monetary officials on tap this week, and parties to the OPEC+ curtailments hold preliminary meetings on Tuesday. Retail sales figures for October in the United States would serve as a warning sign of what’s to come. Apart from the usual suspects, though, there aren’t that many technical data points coming in that would drive the market. That leaves us with sentiment and fear. Things will likely get worse before they get better so we’re sticking with the Red alert, expecting crude oil prices to move by at least plus or minus 4% on the week.