Apr 10, 2020

Axios Generate

Good morning. Today's Smart Brevity count: 1,439 words, a 5.4-minute read.

Situational awareness: World Central Kitchen is working to feed vulnerable people and help the badly distressed restaurant sector at the same time. Donate here.

And yesterday marked the 1984 release date of the R.E.M. album "Reckoning," which provides today's intro tune...

1 big thing: Oil's getting help but won't escape deep distress

Illustration: Aïda Amer/Axios

The new OPEC-Russia agreement to steeply cut production should help the oil market avoid a complete meltdown, but it's nowhere near enough to undo the damage from the COVID-19 pandemic, analysts say.

Oh, and it's not even a done deal yet as G20 energy ministers get ready for separate but related talks that begin this morning.

Driving the news: The OPEC+ group, led by Saudi Arabia and Russia, yesterday held marathon remote talks that yielded an agreement to jointly pare back production by 10 million barrels per day for two months beginning in May.

The size of the cuts then declines in stages through the end of April 2022 (but would be reviewed before that date).

Why it matters: It's the first major coordinated response to the pandemic that's creating an unprecedented collapse in global oil demand and has pushed prices to very low levels.

The deal marks a truce between the Russians and Saudis, whose failure to reach an agreement a month ago worsened the price collapse, sending prices to their lowest levels in two decades before more recent (but limited) gains.

But, but, but: Delegates could not reach an agreement with Mexico on the size of its contribution, so the official OPEC statement notes the result is "conditional on the consent of Mexico."

What's next: The lingering questions about the state of the pact put even greater weight on remote talks that begin this morning among G20 energy ministers, including the U.S.

The market reaction to the still-unfinished OPEC+ deal will likely hinge on whether the question of Mexico's posture is resolved, and signs that producers outside the OPEC+ group will curb output, too.

The intrigue: The U.S. has not offered a firm production-cutting commitment. But Saudi Arabia — which is OPEC's dominant producer — appears satisfied with the White House posture that market-driven declines represent the U.S. contribution.

  • Saudi energy minister Prince Abdulaziz bin Salman, asked by Reuters about other countries including the U.S., Canada and Brazil joining the effort, said:
  • “They will do it in their own way, using their own approaches, and it is not our job to dictate to others what they could do based on their national circumstances.”
  • President Trump spoke by phone with Russian President Vladimir Putin and Saudi King Salman Thursday evening.

The global benchmark Brent crude closed in the mid-$31-per-barrel range Thursday.

  • That's several dollars below where it ended last week, and for that matter, where it was earlier in the day, when the market responded to expectations of a major deal.
  • However, it's still around $10 above where it was in the middle of last week.

Go deeper: Global Oil Deal at Risk After Mexico Ditches Saudi-Russia Plan (Bloomberg)

Editor's note: This item has been corrected to reflect the price of Brent crude oil during trading on Thursday (not Friday).

Bonus: What they're saying about the OPEC+ plan

The new production-cutting deal is both very big and insufficient to bring balance back to capsized oil markets, oil analysts said.

Why it matters: Lockdowns and the massive slowdown in economic activity are causing declines in demand that far outstrip the planned 10 million barrel-per-day cut, though there will also be declines from producers outside OPEC+.

The big picture: Estimates vary but some analysts see near-term demand loss in the 20 million-30 million barrel-per-day range, which is immense in a roughly 100 million barrel-per-day market.

The demand loss is so severe that it's testing the limits of physical oil storage capacity.

What they're saying: "The proposed 10 million bpd cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still not restore the desired market balance," the consultancy Rystad Energy said in a short note.

  • "At the current rate of stock build, storage will be full at some point in May and crude production will need to be curtailed by 15-20 million b/d," Chris Midgley of S&P Global Platts Analytics said in a note.
  • "The current proposed 10 million b/d may be too little too late as it will have limited impact on April production and only if sustained from May for the balance of the year might we avoid hitting tank tops," he said.

The intrigue: One interesting question is what mix of U.S. pressure and economic self-interest led to the revival of Saudi-Russia cooperation on production.

  • "I think Saudi Arabia values its perception as a responsible stabilizer of oil markets in a time of crisis like this," Jason Bordoff, head of a Columbia University energy think tank, tells Axios.
  • "Both Saudi Arabia and Russia have come under intense pressure from Congress and the White House to prop up oil prices, and would like to see higher oil prices themselves as they face significant domestic fiscal pressures," said Bordoff, who has more to say about the limits of global oil cooperation here.
2. A historic drop in carbon emissions
Chart courtesy of Carbon Brief.

COVID-19 will likely cause a drop in global carbon dioxide emissions that's far larger than any prior crisis or war, per a new analysis that combines multiple datasets to provide a wide-ranging look at the pandemic's effect.

What they found: The analysis from the U.K.-based Carbon Brief provides a tentative estimate that global CO2 emissions are likely to fall by more than 4% from 2019 levels.

  • And data from countries and sectors not yet available is expected to increase the total, they find, and also note that some estimates of oil consumption declines have grown since they completed their post.
  • They also caution that efforts to gauge the virus' effects are complicated by unknowns about the duration of the crisis and lockdowns, among other variables.

Why it matters: It provides a sense of the staggering effects of the outbreak that's freezing huge amounts of travel and economic activity.

But it also provides an unfolding, real-time look at the immense challenge implementing policies that cut emissions steeply enough to meet the goals of the Paris climate agreement.

Here's how they contextualize a one-year drop of more 4%...

"Global emissions would need to fall by more than 6% every year this decade — more than 2,200MtCO2 annually — in order to limit warming to less than 1.5C above pre-industrial temperatures."

Don't forget: Tracking the emissions effects isn't the same as celebrating them. The Carbon Brief piece clears its throat by noting the pandemic is "decimating lives, livelihoods and the normal functioning of society."

3. Public transit's lasting wounds

Illustration: Eniola Odetunde/Axios

Public transit ridership has collapsed in systems across the country, funding streams are squeezed, and mass transit won't bounce back from the pandemic nearly as fast as other transportation modes, Axios' Kim Hart reports.

Why it matters: Transit agencies could see an annual shortfall of as much as $38 billion due to the pandemic, according to TransitCenter.

  • At the same time, they're more important than ever, with more than 36% of essential workers relying on public transportation to get to work.
  • "There's never been a time in which transit in one fell swoop has taken such a hit," said Sam Schwartz, CEO of his own consulting firm and former New York City traffic commissioner.

Quick take: I recommend Kim's entire in-depth story (it's still a quick read because that's our thing), but I want to highlight one part that's relevant to the pandemic's uncertain long-term effects on energy use.

  • One question is whether and how fast ridership patterns return to normal when the crisis eases.

Threat level: With COVID-19 so contagious, passengers will be hesitant to sit shoulder-to-shoulder on subways or in crowded buses for what could be a substantial period of time, even after people gradually return to work, Kim notes.

  • People will likely rely more on personal cars, or even personally owned bikes and scooters that are not shared, said David Zipper, visiting fellow at Harvard's Taubman Center for State and Local Government.

Go deeper: Imagining a new energy normal after coronavirus

4. Fresh signs of shale patch jeopardy

A few items caught my eye that together help show the effects of the oil price collapse on U.S. producers.

Finance: "Major U.S. lenders are preparing to become operators of oil and gas fields across the country for the first time in a generation to avoid losses on loans to energy companies that may go bankrupt," Reuters reports, citing sources aware of the plan.

The report that banking giants JPMorgan, Wells Fargo, Bank of America and Citigroup are all in the process of creating independent companies to own oil-and-gas assets.

More finance: Via The Wall Street Journal, "Mutual-fund company Franklin Resources Inc. is taking steps to prepare for a potential debt restructuring or bankruptcy of indebted oil-and-gas driller Chesapeake Energy Corp."

Meanwhile, Bloomberg reports that the giant independent producer Occidental Petroleum is pressing for federal aid for U.S. oil-and-gas companies.

They report that the company's CEO is urging employees to tell Congress that the government should provide "liquidity to the energy industry through this period of unprecedented demand destruction and unsustainable pricing until normal economic conditions return."