March 09, 2020
Good morning doesn't seem quite right given what's going on in the world right now.
Today's Smart Brevity count: 1,437 words, 5.5 minutes.
I'll share a glimpse of my latest column where I look at the concept of risk, and then Ben Geman will get you up on the latest oil market chaos and more.
1 big thing: The obvious risks we ignore
Forget black swans. We’re getting run over by two gray rhinos: coronavirus and climate change.
The intrigue: A gray rhino is a metaphor coined by risk expert Michele Wucker to describe “highly obvious, highly probable, but still neglected” dangers, as opposed to unforeseeable or highly improbable risks — the kind in the black swan metaphor.
The big picture: The novel coronavirus spreading infections and fear around the world is prompting black swan references from the media and investors alike, as is climate change’s impact on financial markets.
- But epidemics like the coronavirus and the slower burn problem of global warming are actually gray rhino risks, because there have been plenty of warnings for those who were paying attention.
Why it matters:
“It matters immensely that decision makers view risks as gray rhinos instead of obsess in vain about black swans, because we can see gray rhinos in front of us, but black swans by definition only appear in the rearview window. That means we have a chance to do something about gray rhinos. And, in fact, most so-called black swans happen because people ignored the gray rhinos.”— Michele Wucker, author of the 2016 book "The Gray Rhino," to Axios
Yes, but: While coronavirus and climate change are both gray rhino risks, their differences explain why the world — and stocks and oil prices — is in a tailspin.
- Coronavirus is a more immediate threat, and the amount of uncertainty surrounding it feels limitless. We don’t know how many people in any given area are infected, and because we don’t know that, questions persist about the accurate mortality rate.
- Climate change is one massive systematic risk that unfolds over decades and centuries. It increases the risk for an infinite number of weather events and patterns.
- While a lot of uncertainty persists here, scientists are getting better at pinpointing risk. To wit: Australia’s bushfires were made at least 30% more likely due to human-driven climate change.
Risks rarely come in isolation or operate in a vacuum. There's the risk of unintended consequences responding to an initial risk.
- Our globally connected world already risks grinding to a halt and having a series of repercussions as coronavirus infections grow.
- In the same vein, if the world drastically slashes use of fossil fuels, energy costs could spike and cause economic crashes and more inequality.
- There’s also competition for attention. Fears over the coronavirus are already slowing key diplomatic meetings on climate change ahead of a highly anticipated year-end summit.
- Climate change is a slower moving risk, so it inevitably gets put on the back burner when millions of people are at risk of dying from a virus outbreak in the coming months.
The bottom line: So what happens when you have multiple gray rhinos coming at you? A group of rhinos is — fittingly and alarmingly — called a crash.
2. Oil markets have utterly blown apart
The global oil landscape has undergone a stunning and tectonic shift since our Friday edition.
Where it stands: Prices have collapsed following the surprise rupture between OPEC and Russia and the demand shock from the spreading novel coronavirus.
- Brent crude is trading at roughly $34.94 this morning, which is actually above the troughs reached since trading resumed Sunday night.
- But consider that it was pushing $70 in early January and began Friday around $50.
- The immediate 31% collapse when trading resumed last night was the second-largest on record behind the 1991 Gulf war, Bloomberg reports.
Catch up fast: The OPEC+ group failed to reach a deal in Vienna Friday to deepen or even extend their production-limiting deal, which now expires at the end of March.
- The weekend brought news that Saudi Arabia was steeply cutting its prices to customers and planning to substantially increase production.
What's new: This morning the International Energy Agency slashed 1.1 million barrels per day from its 2020 oil demand forecast as COVID-19 crimps travel and economies.
- The agency now sees a year-over-year drop in demand for the first time since 2009.
- Their central case sees a slight 90,000 bpd annual drop, but they warn it could be significantly more. On the other hand, in a more optimistic virus containment scenario, there could still be demand growth.
"With a combination of a massive supply overhang and a significant demand shock at the same time, the situation we are witnessing today seems to have no equal in oil market history."— IEA executive director Fatih Birol, via Twitter
3. Making sense of the oil market's unraveling
There's a million dimensions to this, but here are a few things I'm watching in light of the OPEC+ collapse and new price wars...
1. A break or a breakup: It's not clear whether or when the OPEC+ alliance might resume cooperation.
- "The lines of communication between Russia and Saudi Arabia are always open," oil analyst Ellen Wald tells Axios, noting their energy ministries are in touch on topics beyond oil production.
- But, but, but: "Saudi Arabia and Russia have fundamentally different priorities when it comes to oil production and oil sales," says Wald, author of the book "Saudi, Inc."
- "Whereas Saudi Arabia sees great benefit in maintaining its position within OPEC, Russia is not a member and does not care about the communal benefits of OPEC decisions," she says.
- The question now is "which producer blinks first," per S&P Global Platts' Chris Midgley. He says in a note that while low prices will test Saudi finances, their low production costs and low debt means they can "pull on sovereign reserves and take the pain."
2. Shale patch pain: The price collapse will hurt U.S. shale producers, who are already facing tough economics and Wall Street pressure to show returns, not just boost output.
- Look for producers to scale back. How much depends on how low things go and for how long, although companies' hedging strategies provide some cushion.
- Goldman Sachs analysts, in a note this morning, gamed out a scenario in which U.S. oil prices were in the $30–$45 range into 2021. Producers would "meaningfully cut back activity" to preserve cash flow and balance sheets, although it depends in specific companies' hedging positions.
- And per a note this morning from the risk analysis firm Verisk Maplecroft's Niamh McBurney: "The impact of this on U.S. shale producers, and how much they may retrench, is what OPEC, and specifically Saudi Arabia and Russia are banking on to be able to return them to their pre-2016 positions, or at least close."
3. U.S. political fallout: My nuclear-hot take is ... it's really hard to say! But it's certainly a new wrinkle in the 2020 election.
- Falling crude prices will push gasoline prices even lower, which would presumably favor President Trump.
- But, but, but: Oil production is vital to the economy in a bunch of states, including the swing state of Colorado and of course Texas.
- Texas hasn't voted in favor of a Democratic White House hopeful since 1976 but could be a longshot hope for Trump's opponent.
- Democrats could make the case that the industry's pain underscores the need to push more quickly into clean energy.
4. What oil's collapse might mean for clean energy
Another big question now that oil markets have blown up: Will this affect oil majors' investments in low-carbon energy projects and acquisitions?
Why it matters: The industry is under intense pressure to boost investments in clean energy and climate initiatives, but the price collapse is a new wild card as it crimps revenues. It's also making petroleum products cheaper.
What's next: I asked Eurasia Group analyst David Livingston about this.
- He notes some big caveats, like uncertainty around the duration of the price collapse, but sees some possible strategies emerging if it's a long-term thing.
- Livingston sees oil majors potentially searching for two different types of assets: distressed independent shale drillers, and clean energy companies and technologies.
The big picture: "If a combination of a prolonged oil price war, plus coronavirus fallout, leads oil industry leadership to view this as a 'lower for longer' situation, then it could lower the expected returns of future oil investment, and in fact make investments in clean energy more attractive on a comparative basis," he said.
5. Catch up fast: Uber, LNG, offshore wind
Transportation: "The California Air Resources Board is now developing the world’s first regulations to reduce the climate impacts of ride hailing. The rules, expected by year’s end, seek to rein in traffic and pollution from an industry that has quickly risen to overtake taxis, in large part by avoiding regulation to begin with." (Los Angeles Times)
Natural gas: "U.S. natural gas terminal developer Tellurian Inc. has cut roughly 40% of its workforce in a massive restructuring effort aimed at slashing costs and rescuing a struggling, $29 billion export project." (Bloomberg)
Renewables: "Offshore wind companies are beefing up their presence on K Street as the Trump administration sidesteps and delays federal reviews of sprawling projects off the East Coast." (E&E News)