Harrison: The Fed Can’t Save Everyone

Your Real Vision Daily Briefing for April 21, 2020

Ash Bennington hosts Ed Harrison continue their discussion on oil markets & tie the broader macroeconomic fundamentals into technical market dynamics.

  • The collapse of oil is a catastrophe for the fossil fuel market and the Fed probably can’t intervene; as a result, the shale sector may shrink dramatically. 
  • The price discovery in oil is a proxy for what’s happening in the real economy and we are likely entering the third phase of the crisis, or the liquidation phase.
  • Emerging markets may get debt relief, but the reluctance of private creditors to get on board could open the door for China to step in and exploit the situation.

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Oil going negative is a fundamental problem not a technical one, and only when there’s a supply withdrawal – in essence, when we see a massive shut in wells and bankruptcies – will supply and demand meet, according to Ash Bennington and Ed Harrison, who discussed the oil market during today’s Real Vision Daily Briefing.

The key issue is that everything is collapsing on the demand side, and Bennington and Harrison said the Fed is unlikely to be able to intervene in a physical market. 

Not everyone will make it out alive because the Fed can’t go around and save everyone. This is important because CCC, and B companies will default, go into bankruptcy, and be liquidated. It spells a huge bust in US shale business and the shale sector will shrink dramatically, they said.

They also said that now is not the time to buy USO because it is a contract with extreme volatility and the average retail investor doesn’t know what they’re getting into. The fundamentals are driving complicated and nuanced technical issues and it is not a place for people who don’t know the market really well to play, they said.

According to Bennington and Harrison, all of this signals that we are going into the third phase of the crisis, or the bankruptcy/liquidation phase. From here, they said we will probably see a convergence down toward the real economy: the recent retracement will fall apart, followed by a period of consolidation, then possibly another leg down.

“This is an absolute catastrophe for fossil fuel market, but it’s also an index, a proxy for what else is happening in the real economy,” Bennington said.

The pair also discussed emerging market debt relief during the briefing and said that the reluctance of private creditors to cooperate with the IMF could set the stage for Chinese interference. They said whether or not Argentina defaults tomorrow could give us clues to the dynamics of the EM situation and how it may play out.