Pro Perspectives 4/2/20

April 2, 2020

We talked about the significance of oil prices this week. 

As we discussed, the Fed has addressed broken financial markets, and ensured stability of the financial system. Congress and the White House have backstopped the American consumer and American businesses.  And there is a discernible game plan launched to fight the healthcare crisis. 

But the broken oil industry has not been addressed.

And with crude oil prices hanging around $20 a barrell, the U.S. shale industry is lined up for bankruptcy. 

Indeed, Whiting Petroleum, with more than a quarter of a billion dollars in debt maturing this year, filed bankruptcy yesterday
That got the wheels turning.  In Trump's press conference late yesterday, he said, after talking to Putin and the MBS, that he expected Russia and Saudi Arabia to "work it out (the dispute on oil production) over the next couple of days."  

This morning, Trump did this …


And oil did this …

Now, assuming this agreement between Russia and OPEC were to take place, we have to be concerned about where oil prices will settle, regardless of production cuts, in a world where global demand has been destroyed by outright stoppages in global economies. 

Looking back, the 60% haircut on oil prices driven by Russian/Saudi gamesmanship, was probably accurate given what has happened to the global economy in the aftermath of that initial spat.  That doesn't bode well for the shale industry.  What's next?  Nationalization? 

That said, the future of the entire economy (not just shale) hinges on the timeline to return to normalcy.  What could flip the switch on it?  A viable treatment for COVID-19, that can bridge us to a vaccine, while enabling for the reopening of the economy. 

On that note, the evidence continues to build for favorable outcomes from the use of hydroxychloroquine.  There was another study (randomized clinical trial) out China showing efficacy: "Among patients with COVID-19, the use of HCQ could significantly shorten TTCR and promote the absorption of pneumonia" (link to that study here). 

We've yet to hear anything concrete from NY trials (that started last week), and from broader "off label" use by New York hospitals, but the latter could come at anytime.  Again, that would be a major turning point, and provide light at the end of the tunnel for the health crisis and for the economy.    

But even with a positive development like that, there would be plenty of economic damage to overcome, and loads of government money and Fed liquidity to mop up.  But it would be a launchpad for gold, and asset prices in general (i.e. inflation).