Bennington: This is a Demand Destruction Story

Your Real Vision Daily Briefing for April 20, 2020

Ash Bennington and Ed Harrison take a deep dive into the chaos of the profoundly fractured oil markets.

  • Oil plummeted to -$37/barrel today in an unprecedented demand shock due to the coronavirus lockdown.
  • The Fed backstop is unlikely to be all-encompassing when it comes to shale and high yield, which will cause distress in the junk space.
  • The crisis is unmasking fundamental challenges in the eurozone and Italy will likely be its biggest problem, as its debt will be unmanageable after the pandemic.

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For the first time in history, oil was trading in negative numbers today at -$37/barrel, a collapse in demand that may see many US shale producers go out of business, Ash Bennington and Ed Harrison said during today’s Real Vision Daily Briefing.

They said that the problem stemmed from people trading and then not wanting to take physical delivery of the contract, and the massive oversupply is causing tanker prices to skyrocket as people start buying floating capacity for oil since physical storage facilities are filling up.

Bennington and Harrison said we don’t know whether this will this happen again in a month’s time, as June’s contract is still trading at $21/barrel.

They also said this is where we may see that the Fed’s backstop won’t be all-encompassing, particularly when it comes to shale and high yield. If energy names go to zero and default, causing distress in the junk space, there’s nothing the Fed can do about it, they said.

Bennington and Harrison also discussed the long-term prognosis for the eurozone in a post-coronavirus world and said that non-sovereign debtors/currency users like Italy would exit the crisis much worse off than sovereign debtors/fiat currency issuers like the US and UK.

Italy entered the crisis with 100% debt to GDP ratio and is expected to exit with 160-180% debt to GDP. While the European Central Bank can do QE, Harrison said there will be a big problem when the crisis is over. 

“The ECB won’t have the wartime mentality to break all the rules. Italy won’t be able to break the rules on the fiscal side either, and that’s where the rubber hits the road,” Harrison said. “When wartime is over what are the consequences? Italy will be a big problem once we move back to a non-pandemic situation.”

Bennington said the crisis is unmasking fundamental challenges in the eurozone.

“You have economies growing at difference speeds, economies paying divergent amounts for issuing sovereign debt – it is difficult to imagine how they will be able to harmonize under a single interest rate,” he said.