The novel coronavirus pandemic has ushered in many “firsts” in modern economic history. That includes the impact on the oil market, where the benchmark price for U.S. oil dipped below $0 on Monday for the first time ever.
But what does that mean for Canada and its oil-producing provinces?
“It really brings home how real the decrease in demand is, how real the oversupply is, how big the price adjustments are going to have to be,” said Andrew Leach, an economist at the University of Alberta.
What went negative on Monday was the price contracts for delivery of West Texas Intermediate (WTI) crude, the benchmark for North American oil prices. With planes grounded and cars sitting in driveways in locked-down economies, global oil demand has collapsed faster than oil producers have been willing or able to adjust.
The result has been storage facilities quickly filling up around the world.
Oil prices drop to historic lows amid pandemic
That’s what caused prices to fall below zero on Monday, experts say. Contracts for May delivery of WTI were set to expire on Tuesday, and many who held those contracts were desperate to to avoid having to take physical delivery of oil for which they had no space — desperate enough to be willing to pay buyers as much as US $37.63 per barrel to take the crude off their hands.
We may well see the same thing happen again when June and July, WTI contracts come due, said Blake Shaffer, an economist at the University of Calgary and former energy trader. And that’s bad news for Alberta’s oil producers, as much of the pricing of western Canada’s crude oil is based on WTI, Shaffer said.
“There’s definitely a lot of physical barrels here that change hands based on a set differential to WTI,” he said.
The degree to which individual producers are directly affected depends on how much of their production they’ve already sold, how they’ve hedged prices and other factors, said Leach.
The largest players in the oilpatch, for example, rely on their own supply chains, with little, if any, of their barrels traded with the contracts that saw the sell-off on Monday, he added.
Still, the key question for oil producers of any size, anywhere is how quickly and how strong the world’s demand for oil will come back, Leach said. And that, he added, depends on the speed and strength of the economic recovery.
The oil crashes impact on Saskatchewan with Greg Poelzer
Canadians are used to hearing that the problem is western Canadian oil trading at a discount because there aren’t enough pipelines to get landlocked crude to market, Shaffer said.
In this case, though, it’s much of the world’s oil supply that has nowhere to go.
“There will be lasting impacts from this,” Schaffer predicted. “There will be companies that don’t make it through.”
For smaller producers, shutting in traditional oil wells is going to be relatively easy, Leach said. For larger oilsands producers, the process is more complicated. For them the focus is more on production slowdowns and not bringing new projects online, he added.
As for jobs, the impact may be less significant than one might expect, but only because the energy industry already went through ferocious cost-cutting during the downturn of 2015, Shaffer said.
Still, the top priority for both provincial and federal governments should be to provide support to workers so that they are able to stay home for as long as the health emergency lasts, Leach and Shaffer said.
Oil price crash prompts calls for green energy
The second order of priority should be providing financial support to the energy industry, they added.
However, both warned against governments doling out cash or cheap loans directly to companies.
The goal should be to help the industry as a whole through the rough patch, not to prop up every single struggling business, Leach said.
If the crisis leads to industry consolidation, with some companies taking over weaker ones, “the government doesn’t need to care,” he added.
One way in which either Ottawa or provincial government could throw a lifeline to the industry without bailing out single companies would be to guarantee loans made by financial institutions, Schaffer said. That way, it would be private-sector lenders who decide who is credit-worthy, he added.
On Wednesday, a new report called for stronger oversight of proposed energy-sector bailouts after finding that millions of dollars previously spent or invested by Alberta since 2015 have helped pay high salaries for executives and dividends for investors at several companies in or near bankruptcy.
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The Alberta Investment Management Corporation “has been engaging in this bailout of Alberta’s oil and gas industry for several years, losing tens of millions in the process,” Duncan Kinney of Progress Alberta, a left-leaning non-profit research and advocacy group, said in a press release.
“This should serve as a clear warning to the federal government as it works out the details of its own financial bailout of oil and gas companies,” he added.
Prime Minister Justin Trudeau has said the federal government is working to provide aid to medium-sized oil and gas companies through Export Development Canada and the Business Development Bank of Canada.
“The challenge of our provincial and federal governments here is to … support the heart of the industry that’s going to make it through while allowing parts of the industry to wither and support workers who are negatively affected through that process,” Shaffer said.
“That’s no easy task.”
— With a file from Mike de Souza at Global News
© 2020 Global News, a division of Corus Entertainment Inc.
Eurozone in fresh emergency action to boost economy – BBC News
The European Central Bank has taken further dramatic measures try to boost the eurozone economies, amid their biggest recession since World War Two.
Just months after emergency measures, the central bank said it would increase the size of its bond buying programme by €600bn (£546bn) to €1.35tn.
The programme will run until June 2021, six months longer than planned.
The move will keep borrowing costs low for countries and firms as they face huge budget deficits and recessions.
The purchases support “funding conditions in the real economy, especially for businesses and households,” the ECB said.
The central bank also decided to hold its interest rates at record lows.
The extra bond buying “is likely to push European government bond yields even further into negative territory, and investors in search of positive returns will be forced to take more risk,” said Rachel Winter, associate investment director at investment firm Killik & Co.
The bond purchases are often referred to as Quantitative Easing (QE). When central banks buy bonds with printed money, the value of the bonds rise and borrowing costs drop.
Some market commentators wonder how much money can safely be printed without causing the value of money to decrease.
“Although inflation is currently very low, these levels of asset purchases are causing some concern about inflation further down the line,” said Ms Winter.
“Economic theory tells us that that inflation is linked to the supply of money in the economy, and if the money supply is being drastically increased to fund quantitative easing then long-term inflation ought to rise too. These fears of long-term inflation have stoked demand for gold recently.”
Gold is trading at about $1,717 (£1,368) an ounce, down from highs of $1,766 earlier in the month, but up compared to a price of $1,324 one year ago.
In many ways, the ECB is playing catch-up with other central banks, said Neil Williams, senior economic adviser at US-based money manager Federated Hermes.
“After lagging the US and UK, the fiscal box is now opening, he said. The planned spending works out at about €100bn a month, higher than the €80bn spent in the wake of the European sovereign debt crisis, he points out.
Impact of new social unrest on the US economy in two charts – Yahoo Canada Finance
In the charts — which you could see below — it’s clear that social unrest as measured by real-time user comments about the economy on Twitter is beginning to weigh on consumer confidence.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Consumer sentiment (left chart) had begun to stabilize in early to mid-May with states reopening and people returning to work after months of COVID-19 lockdowns. But then came the senseless killing of George Floyd by Minnesota police in late May and rampant protests and looting, and a plunge in consumer sentiment per Twitter data analyzed by Goldman.” data-reactid=”20″>Consumer sentiment (left chart) had begun to stabilize in early to mid-May with states reopening and people returning to work after months of COVID-19 lockdowns. But then came the senseless killing of George Floyd by Minnesota police in late May and rampant protests and looting, and a plunge in consumer sentiment per Twitter data analyzed by Goldman.
Meanwhile, negative sentiment on the economy (right chart) as measured by tweets not mentioning coronavirus has spiked over the past week. Some strategists have pushed back on a chart like this one, noting it’s part of a larger issue holding the economy back.
Great charts, although I would challenge the causation.
Social unrest reflects hopelessness – it is a consequence of extremely low confidence – the same low confidence that is likely to impact the economy, too. https://t.co/h5mjPWvn8X
— Peter Atwater (@Peter_Atwater) June 4, 2020
Ultimately it’s hard to determine if weakening consumer confidence over the past two weeks has seriously derailed a U.S. economy already in a sharp recession due to COVID-19. But for those on the Street betting for a V-shaped economic recovery later this year (stat: the S&P 500 is only 7.8% below its February record highs), the data presented by Goldman hints that is far from a sure bet as social unrest is sustained, weighs on consumer psyche and spending decisions.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.” data-reactid=”25″>Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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Higgs calls for 'cultural shift' to turn N.B.'s economic fortunes around – CBC.ca
Like a malfunctioning time machine, the COVID-19 crisis is threatening to transport New Brunswick’s economy back to where it was in 2010 or earlier, and that has Premier Blaine Higgs calling for radical changes in the province’s work ethic and entrepreneurial instincts coming out of the pandemic.
“We need a cultural shift here in New Brunswick. We need momentum that’s going to be created from this COVID crises,” Higgs said last week during a wide-ranging talk about New Brunswick’s economic problems on the provincial business podcast “Turning Point.”
“This may be a wake-up call for the country and for New Brunswick. I’m hoping we can springboard off of this.”
Economic growth in New Brunswick has been so weak since the global financial crisis of 2008 it is not out of the question for all of the gains of the last decade or longer to be rolled back just this year.
Two weeks ago, New Brunswick’s department of finance projected the province’s economy will shrink by 4.3 per cent in 2020, with an average of private sector forecasts predicting a larger decline of 5.5 per cent.
Contractions of those amounts would send New Brunswick’s economy back to the size it was somewhere between 2007 and 2010, erasing up to 12 years of accumulated growth.
By contrast in better performing neighbouring economies, a five per cent contraction would erase just three years of growth in Nova Scotia, two in Quebec and a little more than one year in P.E.I.
He called on entrepreneurs to think bigger about what is possible and on citizens to place more value on work.
“i think we can do a whole lot here in New Brunswick and attitude plays a role — a cultural shift plays a role,” said Higgs.
Claiming a number of New Brunswick firms could grow their businesses through export — but don’t — and a number of citizens could work — but won’t — the premier said it was important to understand what is holding the province back economically and fix it.
Stung by the reluctance of locals to fill jobs left vacant by a short-lived ban on temporary foreign workers, Higgs acknowledged low pay may be causing disincentives to employment in some cases but expressed his own belief that a lack of work ethic in the population is also causing problems.
“I think we have to understand why the jobs that are available here are not jobs we’re proud of and want to be part of,” said Higgs.
“Are the wages high enough? But wages have to be tied with productivity. You do have to see if you’re going to earn more money there has to be a working culture there to support that because they go hand in hand.
“How many of the processors said to me — the farmers, other industries — said to me, ‘You know I need four, five six New Brunswick workers to replace one temporary foreign worker.’ What does that say about us as a society?”
Higgs appeared to make an outdated reference to the operation of the federal government’s employment insurance program, claiming without citing the evidence that too many New Brunswick residents are happy to work for 10 weeks and collect assistance the rest of the year.
“We have a system where people think being on the 10-42 program is a way of life,” said Higgs.
But according to rules posted by Employment and Social Development Canada that’s not how the employment insurance system works.
Prior to the pandemic New Brunswick residents were required to work a minimum of 490 hours, at least 12 weeks, to qualify for 23 weeks of regular EI benefits in provincial regions with the highest unemployment rates.
Earning 42 weeks of regular benefits required at least 1,610 hours of work in the previous year, or about 40 weeks of full time work.
He pointed, as he often does, to entrepreneur Amarjeet Singh Jatana of Canadian National Growers Inc. who three years ago began purchasing hundreds of acres of farmland in Kent County without government help to grow and export apples. Higgs said it is an example of how local businesses often overlook opportunity.
“They were actually told you can’t do that here in New Brunswick. They have orchards around the world and they looked at our climate and said that’s a really good spot.” said Higgs.
“Sometimes we under-sell ourselves. We can convince ourselves you can’t do that in New Brunswick and that was a clear case. Even the farmers and the associations were like, ‘Oh, they can’t do that here in New Brunswick.'”
Higgs said he hopes the pandemic has shown the province it can come together and achieve important goals, a lesson he wants applied to the economy to end years of lacklustre growth.
“We don’t go back to where we were,” said Higgs. “We go well beyond where we were.”
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