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What the turmoil in oil markets means for Canada’s economy – Maclean's

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Negative oil prices are a warning sign that the economic fallout from COVID-19 could be even worse than a lot of people are expecting

You don’t have to be a commodities trader to know that something extremely unusual is happening to oil prices. For the first time ever, the price of West Texas Intermediate crude dropped below zero on Monday, ending the day at negative $37. The decline seemed to have come out of nowhere, too, with prices plummeting by 302 per cent over the course of a few hours. (Prices “rebounded” on Tuesday to $9 at the time of writing.)

With Canada still very much an oil economy, it’s likely that a lot of Canadians took notice of this unprecedented price decline, but what does it really mean and what might be the impact on this country’s already struggling finances?

Too much oil supply, not enough demand

There are a couple parts to this price plummeting story, but we’ll start with supply and demand. In some ways, commodity pricing is easy to understand. The more of something people want to buy, the higher the price goes. If that item is overproduced and therefore readily available anywhere and from anyone, sellers will make the price more attractive so that buyers will take it off their hands. Ideally, supply and demand would be in balance—companies would produce about as much oil as people want to buy—but that’s not what tends to happen.

Over the last several years, oil production has ramped up significantly, particularly in the U.S. America is now producing 140 per cent more barrels of oil per day than they were in January 2010. With energy economies like Canada, Saudi Arabia and Russia still pumping out the Texas tea, you’ve got a lot more oil now than you did a decade ago.

READ: A different type of crisis demands a different type of data

While supply and demand has, more or less, been in balance for a few years—partly because Russia, Saudi Arabia and other Middle East nations have cut production to keep oil prices stable—there have been times when supply has outpaced demand, which has then caused prices to fall.

Since mid-March, when people started staying indoors, demand for oil has fallen off a cliff. People don’t need gas anymore, which is the main end-product of oil, as they’re not driving or flying anywhere. At the same time, production continues, with U.S. oil and gas producers still pumping out about 12 million barrels of oil per day.

Nowhere to store excess oil

What happens to U.S. oil that doesn’t get purchased? It gets stored in large crude oil tanks, mainly in Cushing, Oklahoma, but also in other areas across the country. Oil companies can store up to 76 million barrels of oil in Cushing, but those storage facilities are nearing capacity. Amrita Sen, chief oil analyst at Energy Aspects, told the Financial Times that Cushing’s storage tanks will be entirely full at some point in May.

Therein lies the problem: There’s too much supply, too little demand and nowhere to store all the stuff that’s still getting produced. If you can’t convince someone to pay you for something you’re selling, and if they won’t even take it off your hands for free, then you might consider paying someone to take possession of an item you want to get rid of. (There’s more to it than that—prices fell when they did in part because of how oil trading works, but it’s complicated.)

READ: A heat map of coronavirus cases in Canada

What does the oil price crash mean for the economy?

Not surprisingly, negative or ultra-low oil prices aren’t good for oil companies or oil-producing countries like Canada, says Martin Pelletier, a Calgary-based portfolio manager with Wellington-Altus Private Counsel Inc. If no one’s buying what you’re selling then you’ll have no choice but to go out of business. It’s no different than the restaurant down the street having to permanently close up shop during COVID-19 because of a lack of customers.

According to Natural Resources Canada, the energy sector accounts for 10 per cent of the country’s gross domestic product and between 11 per cent and 20 per cent of total exports, depending on the year. If more companies close and more layoffs happen, then it’s pretty clear that Canada’s economy will be even more compromised. “The impact will be even more profound in Canada and it will work its way into other areas,” says Pelletier.

The rapid price decline is also a sign that the economic devastation from COVID-19 may be worse than many people, including stock market investors, think. (The S&P/TSX Composite Index was down three per cent on Tuesday, which is a lot in normal times, but not so much today.) “The energy market is telling you that broader economies are in awful shape,” says Pelletier. “It’s going to be terrible. The average person is underestimating COVID’s economic impact.”

What about gas prices?

The only silver lining for cash-conscious Canadians is that gas prices will fall even further, though this only really matters if you’re still commuting to work. Unfortunately, you won’t get paid to fill up your car, but prices could fall by another 10 cents a litre if oil stays low for a while, says Patrick De Haan, head of Petroleum Analysis at Gas Buddy. As well, you’ll still have to pay taxes on gas, which in Ontario adds 37 cents on every litre pumped.

The other thing to keep in mind is that oil prices won’t be down forever. When you look at the futures market and what traders are willing to pay in the summer and fall for a barrel of oil, it’s back into the $20 range. That could drop if demand doesn’t pick up, but there is at least some hope that when the social distancing restrictions end people will start driving again.

Even so, prices may not rise enough to help Canada’s energy sector—Pelletier says the right price level for oil is around $45 a barrel—but negative oil won’t become the norm.

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Charts Showing Good and Bad News for Nigeria's Economy Last Week – BNN

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(Bloomberg) — Africa’s largest economy had a week of good and bad news as the oil price rebounded to the highest level in two months, while the negative impact of the coronavirus pandemic on consumers and business activity became clearer.

Crude prices have doubled since hitting a two-decade low in April, climbing past $40 a barrel after OPEC+ cuts started taking excess supplies from the market. With oil bringing in 90% of foreign exchange revenue for the continent’s largest producer, this will boost government income and dollar liquidity. Ironically, Nigeria is among the countries accused by the production group of not fully complying with the reductions that helped push up prices in the last month.

The following four charts show some of the bad and the good for Nigeria.

If oil prices stabilize close to the current levels until the end of the year, it would add modest upside risks to forecasts for economic growth, public finances and international reserves, said Mahmoud Harb, a director at Fitch Ratings. A 10% rise in the full year’s average crude price above the company’s current forecast of $35 per barrel would improve Nigeria’s current-account deficit by about 1.5% of gross domestic product, he said.

Yields on Nigerian bonds maturing in 2047 fell from an all-time high of 13.2% on March 19 to 8.6% on Friday, a sign that investor concern has eased. Although the West African nation has ruled out going to international bond markets this year, the cost of raising new debt will be relatively lower now if it chooses to.

Although the purchasing managers index of Stanbic IBTC Bank and IHS Markit’ rose last month, it remained below 50, suggesting the economy of Africa’s largest crude producer will shrink in the second quarter. The central bank said last week Nigeria may avert a recession and that the drop in GDP could be less than the 3.4% projected by the International Monetary Fund, but its own manufacturing PMI fell to 42.4 in May after staying above 50 for 36 consecutive months. The manufacturing PMI compiled by Lagos-based FBNQuest Capital fell to 43.3 in May from 45.8, with all sub-indices in contracting territory.

“The recession this year will be smaller than in advanced and many peer economies because of the limits to Nigeria’s integration within the global economy,” analysts at investment banking firm, FBNQuest wrote in a note on Friday. “For the same reason its U-shaped recovery in 2021 is likely to disappoint. Household demand remains squeezed.”

Nigeran consumers are feeling the impact of the disruption in economic activities, data released Friday by the statistics agency shows. At least 79% of respondents in a survey said their incomes have decreased since mid-March, when restrictions were imposed to curb the spread the pandemic. More than 42% who were working before the pandemic now say they no longer do and 51% of households were forced to buy less food due to higher costs.

©2020 Bloomberg L.P.

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Coronavirus 'a devastating blow for world economy' – BBC News

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The coronavirus pandemic is a “devastating blow” for the world economy, according to World Bank President David Malpass.

Mr Malpass warned that billions of people would have their livelihoods affected by the pandemic.

He said that the economic fallout could last for a decade.

In May, Mr Malpass warned that 60 million people could be pushed into “extreme poverty” by the effects of coronavirus.

The World Bank defines “extreme poverty” as living on less than $1.90 (£1.55) per person per day.

However, in an interview on Friday Mr Malpass said that more than 60 million people could find themselves with less than £1 per day to live on.

Mr Malpass told BBC Radio 4’s The World This Weekend: “It [coronavirus] has been a devastating blow for the economy.

“The combination of the pandemic itself, and the shutdowns, has meant billions of people whose livelihoods have been disrupted. That’s concerning.

“Both the direct consequences, meaning lost income, but also then the health consequences, the social consequences, are really harsh.”

Mr Malpass warned it’s been those who can least afford it who’ve suffered the most.

“We can see that with the stock market in the US being relatively high, and yet people in the poor countries being not only unemployed, but unable to get any work even in the informal sector. And that’s going to have consequences for a decade.”

The World Bank, along with its counterparts, has been providing support to the worst affected countries, but says much more is needed.

It is calling on commercial lenders such as banks and pension funds to offer debt relief to poor countries.

He would also like them to make the terms of their loans clearer, so other investors are more confident about putting money into those economies.

Targeted government support and measures to shore up the private sector are also vital to rebuild economies, the World Bank argues.

Investment and support would create jobs in areas like manufacturing, to replace those in the worst affected sectors, such as tourism, which may have been permanently lost.

‘Tensions and inequality’

Mr Malpass admits the damage to global trade, and inclinations to bring supply chains closer to home or erect trade barriers, are a challenge.

“When trade is reduced, that creates its own set of tensions and inequality… I’m sure [the global economy] will be interconnected in the future, maybe less than it was pre-COVID.”

But ultimately, Mr Malpass said the “catastrophe” could be overcome, and that people were “flexible, they’re resilient” .

“I think it’s possible to find paths, it’s hard work for countries and governments to do that.

“But we can encourage that effort… I’m an optimist, over the long run, that human nature is strong, and innovation is real. The world is moving fast and connectivity… has never been higher. And so that gives hope for the future.”

However, he admits the challenge is getting the right plans in place at the right time – and in the meantime, the pain could be considerable.

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Guardians of the World Economy Stagger From Rescue to Recovery – Yahoo Canada Finance

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Guardians of the World Economy Stagger From Rescue to Recovery

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(Bloomberg) — The world’s governments and central banks are shifting from rescue to recovery mode as the deepest slump since the Great Depression shows signs of bottoming out.

After rolling out trillions of dollars worth of measures to prevent their economies and markets from collapsing, they are now doubling down with even more spending to backstop a recovery as coronavirus lockdowns ease. In what counts for good news these days, Bloomberg Economics’ global GDP growth tracker showed economies contracted at an annualized rate of 2.3% in May, less than the 4.8% slump in April.

“Policy makers are moving from triage to recovery,” said Deutsche Bank Securities Chief Economist Torsten Slok. “They are realizing that more fiscal support will be needed to households and small businesses to prevent this liquidity crisis from turning into a solvency crisis.”

The new wave of stimulus has both governments and central banks moving in sync to continue flooding lenders, markets and companies with cheap credit at an unprecedented pace.

The European Central Bank last week expanded its asset purchases by 600 billion euros ($677 billion) to 1.35 trillion euros, and extended them until at least the end of June 2021. And Germany’s government agreed another 130 billion-euro fiscal stimulus push and said it will back a proposed new 750 billion-euro European Union recovery fund.

“Action had to be taken,” ECB President Christine Lagarde said in a press conference.

It’s a similar story in Asia.

Japan is planning another $1.1 trillion worth of spending in its biggest splurge yet and the central bank in May called an emergency meeting to roll out 30 trillion yen ($274 billion) of loan support for small businesses.

China last week unveiled another 3.6 trillion yuan ($508 billion) in spending and South Korea’s 76 trillion won ($63 billion) ‘New Deal’ fiscal package is its largest to date.

In the U.S., lawmakers continue to debate extra fiscal stimulus and the Federal Reserve, which meets on June 10, has just launched a new Main Street Lending Program, the latest in trillions of support it has already poured into the economy and markets.

While the Fed is unlikely to signal any moves when its officials gather this week, many economists expect it to harden its commitment to easy monetary policy later in the year and perhaps even start pursing a Japan-style campaign to control long-term borrowing rates.

The latest U.S. jobs numbers give some hope that the stimulus unleashed so far is beginning to kick in. A record 2.5 million workers were added by employers during May while unemployment declined to 13.3%, wrong footing economists who had forecast widespread job losses.

Read more: Economists Have Biggest Miss Ever in U.S. Jobs-Report Shocker

To be sure, there’s far from consensus that the latest wave of support will be enough to get growth back to where it was at the start of the year. Some of the steps being taken are merely to replace existing policies as they start to expire.

“It seems clear already approved packages are perceived to be not enough,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA.

There are other concerns that monetary policy can only do so much to revive growth before it loses its potency.

“How does the Fed actually get money to millions and millions of households and small businesses, that is difficult to do operationally,” former New York Federal Reserve Bank President William Dudley told Bloomberg Television.

“It’s much easier to intervene in the capital markets where the Fed can rely on counterparties, primary dealers and others,” Dudley said. “It is much more difficult to lend one by one to millions of different entities.”

Another risk is a return to austerity, even if it seems unlikely now. JPMorgan recently predicted a fiscal thrust of 3.3% of GDP this year and 1.5% drag next year.

U.S. senators have put the brakes on a $3 trillion fiscal package that was approved by lower house lawmakers. China’s government has ruled out a return to the kind of large scale stimulus it rolled out after the global financial crisis, preferring to keep a lid on rising debt.

Still, because the crisis meant economies were forced into shutdown, much of the emergency response so far has been less about driving growth and more about avoiding total collapse. It’s that dynamic which is leaving governments with little option but to borrow harder.

“We shouldn’t look at the positive immediate growth impact of the opening up process as being the rate of growth that may last,” said David Mann, chief economist for Standard Chartered Plc.

Creating jobs will be mission critical to cementing any upswing. That will need support for firms to retrain employees, incentives to hire older workers and for governments to continue with wage subsidies. More than one in six people have stopped working since the onset of the crisis, according to the International Labour Organization, which in April estimated more than 1 billion workers were at high risk of a pay cut or losing their job.

“A faster job market recovery will speed up the economic healing and reduce the risk from widening income inequality and social stress,” said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte.

Ultimately, the rescue of economies will go well beyond quantitative solutions and into the realm of story telling too, as policy makers will need to inject confidence back into wary consumers and executives, said Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital in London.

“Human psychology is the same and is now as important as the mechanics of delivering the fiscal stimuli themselves,” he said.

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