Europe’s Virus Response Has Put the Euro in a Win-Win Situation By Bloomberg



© Reuters. Europe’s Virus Response Has Put the Euro in a Win-Win Situation

(Bloomberg) — Regardless of what the spread of the coronavirus does to demand for risk, market indicators suggest the euro will rise.

The common currency is inching toward a close above its 200-week average for the first time in a year. A convincing break would be the latest in a string of signals from traders that the momentum behind the euro’s third monthly advance — for the first time in more than two years — is growing.

What’s driving the rally is optimism over the European Union’s handling of the virus, including talks of a joint recovery fund, and governments’ relatively swift implementations of lockdowns. That stands in contrast to the pandemic response from across the Atlantic.

The euro area’s recession as a result of those lockdowns probably won’t be as deep as previously feared, according to some European policy makers. Meanwhile, with the virus spreading across the U.S., which took time to implement lockdowns, Federal Reserve Bank of Atlanta President Raphael Bostic suggested that economic activity in parts of the country is showing signs of leveling off.

This divergence in views from policy makers in the U.S. and EU, together with central banks worldwide backstopping financial markets with unprecedented stimulus, has weighed on Bloomberg’s .

The gauge has fallen three straight months, the longest such run in more than a year. It measures the greenback against a basket of currencies, of which the euro accounts for about a third.

Betting that the euro will gain over the next six months against the dollar now comes at a premium, as shown by so-called risk reversal options. While these signaled bearish sentiment on the common currency in recent months, this week they turned the most positive since March.

The Signs

A close above its 200-weekly moving average would be the euro’s first in a year. Should it surpass a key resistance level at the June 10 high of $1.1422, it will be trading at the highest in four months.

Propelling the euro forward is the strongest bullish sentiment since 2018, with bulls taking over the price action for six straight weeks, the longest streak this year, according to Bloomberg’s Fear/Greed indicator.

Bloomberg’s option probability calculator shows the common currency is 50% more likely to trade above $1.15 in a week’s time than to drop below $1.12.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

©2020 Bloomberg L.P.

 

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Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Import Collapse Turns Into a Boon for Philippine’s Currency By Bloomberg



© Reuters. Import Collapse Turns Into a Boon for Philippine’s Currency

(Bloomberg) — One consequence of the Philippines’ struggling economy is turning into a boon for its currency.

A collapse in imports has had a positive effect on the nation’s trade deficit, leading to lower demand for overseas currencies and helping to strengthen the peso. The Philippine currency is the best performer in Asia this year, up more than 2% against the dollar.

“With Philippine growth likely to be hamstrung by enforced and voluntary social distancing, imports will remain weak,” said Eugenia Fabon Victorino, head of Asia strategy at SEB AB in Singapore. “This will cap the trade deficit, allowing the peso to strengthen.”

Imports slumped 65% year-on-year in April to their lowest since the global financial crisis. That was a continuation of a trend seen in the first quarter, when a decline in goods imports outpaced a drop in exports, narrowing the country’s goods trade deficit to $10.2 billion from $12.2 billion a year previously.

The narrower gap is helping offset the impact of a decline in remittances from the Philippines’ overseas workers, which is expected to weigh on the currency. Bangko Sentral ng Pilipinas estimates a 5% slide in remittances this year to $28.6 billion.

The Philippines is bracing for its deepest economic slump in more than three decades, with a contraction of 2% to 3.4% on the cards for this year as virus cases continue to rise. President Rodrigo Duterte said he will “have to be very circumspect in reopening the economy” given the recent spike.

This year will be the year that investment drops off, and with it demand for imports and dollars, “which translates to the stronger peso story,” said Nicholas Mapa, senior economist at ING Groep (AS:) NV in Manila.

©2020 Bloomberg L.P.

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Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Yuan Turns Into Global Risk Bellwether as China Leads Recovery By Bloomberg



© Reuters. Yuan Turns Into Global Risk Bellwether as China Leads Recovery

(Bloomberg) — As the dollar shows signs of exhaustion, the yuan is taking over as the barometer of global risk sentiment.

A worldwide rally in stocks, bonds and commodities is decoupling from the U.S. currency, which entered a bearish phase in June and is grinding lower for a fourth month. The rally is increasingly mirroring moves in the Chinese currency as it breaks psychological barriers and builds on its best month since October.

The closer relationship is no coincidence. At the heart of the global advance — and the yuan’s appreciation — is the growing optimism that China will lead the world out of the economic slump brought on by the pandemic. A tide of central bank liquidity, including from the Federal Reserve, is pouring into yuan assets as well as markets with close ties to the second-largest economy.

China Factory Deflation Eased in June With Recovery on Track (2)

This is the culmination of a process that started after the yuan’s shock devaluation in August 2015, with turning points for the Chinese currency often coinciding with shifts in global markets. And now, it may also be an indication that troubles in the U.S. — including a second wave of coronavirus infections — may have less effect on overseas markets if China’s recovery continues.

Here are some ways the yuan and global markets are joining hands:

The euro and the yuan are now following each other more often than at any time in the past 13 months. Their positive correlation increases in times of global risk-on rallies, such as in 2016, and falls in turbulent times, like last year when trade worries dominated. It even turned negative during the 2013 taper tantrum.

The relationship is thus an indirect indicator of the fortunes of euro-denominated assets, as well as Eastern European currencies that closely track the shared currency.

But nowhere else is the yuan’s influence more pronounced than in commodity prices. The Bloomberg Commodity Index now has the strongest beta with the yuan since 2011. That means a one percent gain for China’s currency translates into almost a 1.3% increase in commodity prices.

When the yuan rises, bond yields fall. That’s the signal from the Bloomberg Barclays (LON:) Global Aggregate Total Return Index, which is heading for the longest streak of monthly gains since May 2017. The negative correlation is a weak 0.26, but that’s still the deepest in three years.

U.S.-China Yield Gap Is Widest on Record. Would Love It.

Emerging markets have always lived under China’s shadow, which is only lengthening now. As Shanghai stocks extend a rally, the country’s market capitalization has reached $9.3 trillion, the highest since June 2015 when Chinese markets went into a tailspin after runaway increases. Now China accounts for 45% of emerging-market stock values, the most dominant in more than four years.

‘No Way I Can Lose’: Inside China’s Stock-Market Frenzy (2)

The increasing role of China’s markets in the macro picture backs the idea that watching the yuan’s moves helps to understand shifts in global markets. There’s just one risk: if Beijing increases its involvement in the market, that could distort the relationship, making the yuan a poor indicator.

©2020 Bloomberg L.P.

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Sunak Faces a Tax Reckoning After $38 Billion Summer Splurge By Bloomberg



© Reuters. Sunak Faces a Tax Reckoning After $38 Billion Summer Splurge

(Bloomberg) — Chancellor of the Exchequer Rishi Sunak faces the prospect of having to raise taxes to repair the public finances after his 30 billion-pound ($38 billion) stimulus package left the U.K. on course to borrow more this year than any time since World War II.

The extra spending will increase the cost of the government’s response to the crisis to almost 190 billion pounds, putting the budget deficit on course to hit 350 billion pounds in the current fiscal year, according to the Resolution Foundation think tank. That would be equivalent to about 17% of GDP.

For now, the pressure on the chancellor is political, rather than market driven. He needs to avoid a second wave of the virus and a wave of mass unemployment. With U.K. 10-year gilt yields close to zero, and hovering around record lows, he can afford to borrow, and postpone the question of how to pay for his largess during the crisis.

“The time to pay for this will come — but not this year and not next,” said Paul Johnson, director of the Institute for Fiscal Studies. “Our capacity to do so will depend above all on how the economy recovers. A reckoning, in the form of higher taxes, will come eventually.”

That would be a problem for Sunak, given his party’s election promise not to raise income tax, national insurance or the U.K.’s sales tax. Any increases could also see some of the stardust fall from the chancellor, whose spending announcements during the crisis have boosted his popularity and left some considering him as a future prime minister.

“These interventions will cost an extraordinary amount of money,” Sunak told the BBC on Thursday. “We can’t sustainably live like this, and over the medium term we can and will return our public finances to a sustainable position.”

So far, Sunak has been helped by the Bank of England’s vast program of government bond purchases, which have kept borrowing costs near the lowest on record. The central banks has supported demand and left billions of pounds of bonds funded at the BOE’s 0.1% interest rate, rather than market rates, bringing down the cost of debt servicing even further.

Yields on gilts barely budged after Sunak’s announcement on Wednesday, and are currently at about 0.18%.

But the scale of the budget deficit risks testing the equanimity of investors, with debt issuance in the first five months of the fiscal year already dwarfing the full-year record reached during the height of the financial crisis.

“We are borrowing at record-low rates that enable us to carry a higher degree of debt,” Sunak told the BBC. “But it would be important that we remain alert to changes in those interest rates.”

A sudden rise in interest rates isn’t the only risk he faces. This week, he also published a reminder of the threat the virus poses to his efforts to balance the books.

Buried in the Treasury document accompanying his statement was an announcement that he had allocated an additional 49 billion pounds to Britain’s public services since March, three times the latest estimate from the Office for Budget Responsibility.

Of that money, almost 32 billion pounds is going to health services, including 15 billion pounds for personal protective equipment and 10 billion pounds for the government’s track and trace program.

“No amount of fiscal support can mask the fact that the U.K. recovery hinges almost solely on avoiding a return to repeated, widespread lockdowns,” said James Smith, a developed markets economist at ING.

 





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A Dearth of Cattle Sends Beef Production Plummeting in Australia By Bloomberg



© Reuters. A Dearth of Cattle Sends Beef Production Plummeting in Australia

(Bloomberg) — Australia’s beef output plunged to the smallest since 2017 as farmers rushed to rebuild herds after rains eased years of severe drought.

Beef production in May tumbled a seasonally adjusted 8.4% from last year to 178,900 tons, according to Australian Bureau of Statistics data. The number of cattle slaughtered dropped by 12.5% on the year to 603,500 head. Both figures are the lowest since November 2017.

Plentiful rains earlier in the year encouraged farmers to add to livestock after the intense drought shrank herds in Australia. That’s created a shortage of cattle for slaughter and meat production, with the benchmark Eastern Young Cattle Indicator trading near a record high.

Still, analysts warn that prices cannot remain decoupled from the broader global economic downturn forever.

“We are left wondering how sustainable cattle prices really are in the midst of a global pandemic and what may be the worst recession since the Great Depression,” National Australia Bank (OTC:) said in a June report. “With prices moving in the opposite direction to local prices in our major competitors, prices will likely fall once restocker interest recedes.”

 

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



China’s Factory Deflation Eased in June With Recovery on Track By Bloomberg



© Reuters. China’s Factory Deflation Eased in June With Recovery on Track

(Bloomberg) — China’s factory deflation eased back in June as the economic recovery continued, while consumer inflation ticked up.

  • The producer price index registered a 3% decline last month from a year earlier, compared with the 3.7% drop in May.
  • The consumer price index rose 2.5% on year following a 2.4% gain the previous month, the National Bureau of Statistics said Thursday. That was the same as the median forecast.
  • The statistics bureau earlier published statements dated 2019 which were then withdrawn.

Key Insights

  • Pork prices, a key element in the country’s CPI basket, rose almost 82%. Pork prices have started rising again due to supply issues including floods and restrictions on meat plants overseas which had seen coronavirus outbreaks.
  • Core inflation, which removes the more volatile food and energy prices, slowed to 0.9%.
  • The recent serious flooding in central China may affect food supplies, which would push up prices for corn and rice.
  • However, “supply-side shocks caused by floods tend to be temporary, unlikely to create persistent inflationary pressure,” China International Capital Corp. economists Liu Liu and Peng Wensheng wrote in a note this week. The growth rate of consumer inflation should slow in the second half of this year due to the high base last year, they wrote.
  • The “economic recovery should continue following the recent rebound in the second quarter. Domestic consumption will likely improve further with continued policy support and activity normalization, assuming no significant re-emergence of new cases, while infrastructure investment is likely to strengthen,” UBS economist Wang Tao wrote in a note this week. “We expect policy to remain supportive, while the recent recovery has reduced incentive for bigger stimulus in the near term.”

Get More

  • The official gauge of manufacturing activity climbed in June, providing more evidence of a gradual recovery from the historic contraction in the first quarter. The earliest indicators for the economy also pointed in the same direction.
  • That progress and the recent rally in the stock market provide some evidence of a rebound, but with the pandemic still hitting global demand, it’s unclear how long that will last.

©2020 Bloomberg L.P.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



China’s FX Reserves Rose for Third Month as Outflows Stay Muted By Bloomberg



© Reuters. China’s FX Reserves Rose for Third Month as Outflows Stay Muted

(Bloomberg) — China’s foreign-currency holdings rose last month, signaling that capital outflow pressures remain muted.

  • Reserves climbed to $3.112 trillion from $3.102 trillion in the previous month, the People’s Bank of China said on Tuesday.

Key Insights

  • The reading is lower than the median estimate of $3.119 trillion in a Bloomberg survey of economists
  • The value of gold reserves rose again to $110.8 billion
  • Table: China’s End-June Forex Reserves at $3.1123 Trillion
  • “Capital outflow pressures may have eased a bit, as the yuan appreciated against the dollar by 1.1% last month,” Wang Tao, chief China economist at UBS Group AG (NYSE:) in Hong Kong, wrote in a note before the data release. “We estimate June’s valuation effect from reserve currencies’ movement was a gain of $9 billion.”

Get More

  • “The depreciation of the greenback and rising asset prices of major economies have pushed up the size of reserves, according to a statement from SAFE

©2020 Bloomberg L.P.

 

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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In the Physical Oil Market, Sour Barrels Trade at Sweet Prices By Bloomberg



© Reuters. In the Physical Oil Market, Sour Barrels Trade at Sweet Prices

(Bloomberg) — Leaving behind the waters of the Caribbean Sea, the 1,100-feet long oil tanker Maran Apollo is emblematic of the wider petroleum market.

Steaming at 11.5 knots, she’s heading toward China, where oil demand is fast recovering, hauling a cargo of two million barrels of . But her voyage didn’t start a few days ago. She loaded in early May, and with no buyers during the worst of the coronavirus outbreak, the supertanker stood floating in the U.S. Gulf of Mexico for almost two months, waiting for better times.

Only a few days ago, she weighed anchor and left for the Chinese port of Rizhao — a sign that refiners are starting to pull in crude that went unwanted for months.

It’s not any kind oil on board, though. Refiners are competing for barrels in one corner of the market known as medium-heavy sour crude — barrels with a higher content in sulfur and relatively dense. It’s the kind of oil that Saudi Arabia and its allies pump. And also the type of crude that’s pumped offshore in the U.S. Gulf of Mexico — and that’s what’s in the Maran Apollo’s tanks.

Like the wine industry, the oil market has its own vintages: global refiners seek their barrels much like connoisseurs covet bottles of Bordeaux and Burgundy. Urals of Russia and Arab Light from Saudi Arabia are normally two of the most widely consumed — think Cabernet Sauvignon, maybe a Merlot. But in today’s oil market, such crude is in increasingly short supply due to record output cuts by the two nations and their allies.

“Deep OPEC+ cuts and demand recovery have tightened balances and this has been reflected in improvements in physical differentials,” said Bassam Fattouh, director of the Oxford Institute for Energy Studies. “But the recovery has not been even, with medium-sour crudes faring better than light-sweet crudes.”

In normal times, medium-sour crude is usually cheaper than other streams, particularly those known as light sweet crude that have a lower sulfur content and are less dense.

But OPEC, which pumps mostly medium-sour crude, has cut output to the lowest since 1991, and Russia has also implemented brutal reductions. On top of that, medium and heavy sour crude accounts for the bulk of the supplies from Iran and Venezuela, where production has collapsed under the weight of U.S. sanctions and lack of investment.

The market is reflecting the under supply. The price of Urals, Russia’s flagship grade, has surged to a record premium to the benchmark. Last week, it briefly changed hands at $2.40 a barrel above Dated Brent, a regional benchmark, compared with a discount of more than $4.50 a barrel in April, according to traders. S&P Global Platts, a price-reporting agency, assessed the grade at a premium of $1.90 for delivery to Rotterdam on June 29, matching a prior record high.

The surge means that Urals is selling in Rotterdam, the main oil refinery hub in northwest Europe, at roughly $45 a barrel, compared with a low point of about $15 a barrel in early April.

The price pattern is similar for other sour crude streams, from Oman in the Middle East to Oriente in Latin America. All are commanding hefty prices at a time when oil demand globally remains down roughly 10% below normal levels. Because sour crude makes a significant chunk of a typical refinery’s diet, the price increase is strangling the plants’ profitability.

“OPEC+ continues to tighten the screws,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. said, referring to the group’s output cuts.

With the physical oil market tightening, OPEC is now able to increase the prices it charges to refiners. On Monday, Saudi Aramco (SE:), the state-owned oil company, lifted its official selling prices to Asia for the third consecutive month, largely reversing all the discounts it offered during a brief price war with Russia in March and April.

Aramco and other national oil companies sell their crude at differentials to oil benchmarks, announcing every month the discount or premium they’re charging to global refiners. These so-called official selling prices help set the tone in the physical oil market, where actual barrels change hands.

The Saudi oil giant is now selling its most dense crude, called Arab Heavy, for the first time ever, at roughly the same price at its flagship Arab Light, an indication of the strength of the market for the medium-heavy sour grades. Typically, Arab Heavy has sold at a discount of about $2-to-$6 a barrel to Arab Light.

Not only is medium-heavy sour crude trading at a premium to benchmarks, but barrels for immediate delivery are commanding premiums to forward contracts, a price pattern known as backwardation that also reflects a tight physical-market. Dubai crude, a Middle Eastern medium sour barrel, is one example: backwardation between barrels for delivery now and in three months has surged to 60 cents per barrel. In mid-April it stood at minus $9.24 per barrel because the physical market was so glutted back then.

©2020 Bloomberg L.P.



$2 Trillion-a-Year Refining Industry Crisis By Bloomberg



© Reuters. Lost in Oil’s Rally: $2 Trillion-a-Year Refining Industry Crisis

(Bloomberg) — Crude oil is the world’s most important commodity, but it’s worthless without a refinery turning it into the products that people actually use: gasoline, diesel, jet-fuel and petrochemicals for plastics. And the world’s refining industry today is in pain like never before.

“Refining margins are absolutely catastrophic,” Patrick Pouyanne, the head of Europe’s top oil refining group Total SA (NYSE:), told investors last month, echoing a widely held view among executives, traders and analysts.

What happens to the oil refining industry at this juncture will have ripple effects across the rest of the energy industry. The multi-billion-dollar plants employ thousands of people and a wave of closures and bankruptcies looms.

“We believe we are entering into an ‘age of consolidation’ for the refining industry,” said Nikhil Bhandari, refining analyst at Goldman Sachs (NYSE:) Inc. The top names of the industry, which collectively processed well over $2 trillion worth of oil last year, are giants such as Exxon Mobil Corp (NYSE:). and Royal Dutch Shell (LON:) Plc. There are also Asian behemoths like Sinopec (NYSE:) of China and Indian Oil Corp., as well as large independents like Marathon Petroleum Corp (NYSE:). and Valero Energy Corp (NYSE:). with their ubiquitous fuel stations.

The problem for the refiners is that what’s killing them is the medicine that’s saving the wider petroleum industry.

When U.S. President Donald Trump engineered record oil production cuts between Saudi Arabia, Russia and the rest of the OPEC+ alliance in April, he may have saved the U.S. shale industry in Texas, Oklahoma and North Dakota, but he squeezed refiners.

A refinery’s economics are ultimately simple: it thrives on the price difference between and fuels like gasoline, earning a profit that’s known in the industry as a cracking margin.

The cuts that Trump brokered lifted crude prices, with benchmark soaring from $16 to $42 a barrel in the space of a few months. But with demand still in the doldrums, gasoline and other refined products prices haven’t recovered as strongly, hurting the refiners.

The industry’s most rudimentary measure of refining profit, known as a 3-2-1 crack spread (it assumes three barrels of crude makes two of gasoline and one of diesel-like fuels), has slumped to its lowest level for the time of the year since 2010. Summer is normally a good period for refiners because demand rises with consumers hitting the road for their vacations. This time, however, some plants are actually losing money when they process a barrel of crude.

Worst Fear

Just a few weeks ago, the outlook appeared to be improving for the world’s biggest oil consumers. Demand in China was almost back to pre-virus levels and U.S. consumption was gradually rebounding. Now, a second wave of infections has prompted Beijing to lock down hundreds of thousands of residents. Covid-19 cases are also on the rise in Latin America and elsewhere.

With demand in the U.S. now showing signs of heading south again as coronavirus cases flare up in top gasoline-consuming regions including Texas, Florida and California, the margins are at risk of deteriorating in America, which accounts for nearly two in each ten barrels of oil refined worldwide.

“The worst fear for refiners is a resurgence of the virus and another series of lockdowns around the world that would again significantly impact demand,” said Andy Lipow, president of Lipow Oil Associates in Houston.

Another problem is that — where it has been recovering — the demand pickup has been uneven from one refined product to the next, creating significant headaches for executives who need to select the best crudes to purchase, and the right fuels to churn out. Gasoline and diesel consumption has surged back, in some cases to 90% of their normal level, but jet-fuel remains nearly as depressed as at the nadir of the coronavirus lockdowns, running at just 10% to 20% of normal in some European countries.

Refiners had resolved the problem by blending much of their jet-fuel output into, effectively, diesel. But that, in turn, is creating a new challenge: too much of so-called middle distillates like diesel and .

“Right now gasoline demand is barely keeping some plants alive,” said Stephen Wolfe, head of crude oil at consultant Energy Aspects Ltd. “And with jet production shifting over to diesel and gasoline production, that puts even more strain on product supply,” he added.

In the U.S. refining belt, processing rates are being continually tweaked in response to potential fluctuations in demand. In April, during the height of U.S. lockdowns, Valero Energy Corp.’s McKee, Texas, refinery cut rates to about 70%. It then raised processing to near 79% in anticipation of the Memorial Day holiday, before finding a new low of 62% by mid June, according to people familiar with the situation.

Ultimately, if refiners don’t make money, they buy less crude, potentially capping the oil-price recovery of the past few months for Brent and other benchmarks. Even so, the actions of Saudi Arabia, Russia and the rest of the OPEC+ group suggest that refiners will remain squeezed for longer, with oil prices outpacing the recovery in fuel prices.

The immediate problem is compounded by a longer-term trend: the industry has probably overbuilt over the last decades, and older plants in places like Europe and the U.S. can’t compete with new ones popping up in China and elsewhere in the world.

“Refinery margins in the next five years are going to be worse than the average for the last five years, and particularly bad in Europe,” said Spencer Welch, vice president of oil markets and downstream consulting at IHS Markit. “We already thought that refining was in for a tough time, even more so now.”

Catalyst for Change

The weakness means that the industry’s collective earnings will plunge to just $40 billion this year, down from $130 billion in 2018, according to an estimate from industry consultant Wood Mackenzie Ltd. of 550 refineries around the world.

That could be a catalyst for change. The demand hit from the virus is yet to cause any delays in a number of mega-refining projects, most of which are in China and the Middle East, that will start operations from 2021 to 2024, according to the analysts at Goldman Sachs. This will cause global utilization rates to be 3% lower over this period than in 2019. Plants are more likely to close in developed countries because the bulk of demand — and new refining capacity — is in developing nations, they said.

Many of the refineries that are being built in the Middle East and China will also get government backing, a fact that only makes life more challenging for the plants in Europe and the U.S.

The industry is already moving to resolve the overcapacity: oil trader Gunvor Group Ltd. has said it may mothball its refinery in Antwerp, and U.S. refining group HollyFrontier Corp. in June announced it was changing its Cheyenne plant from processing crude oil into a renewable diesel facility.

For now though, there’s a more mundane reality to deal with: the market. OPEC and its allies can constrain the supply of crude — squeezing refiners — but they can’t make end users consume fuel.

©2020 Bloomberg L.P.

 



Europe Pushes to Avoid Economic Calamity By Extending Crisis Aid By Bloomberg



© Reuters. Europe Pushes to Avoid Economic Calamity By Extending Crisis Aid

(Bloomberg) — European governments are fast learning that they’ll have to live with aid programs to save jobs and businesses longer than thought to keep the economy from falling off a cliff.

Across the continent, furlough programs that shielded close to 50 million jobs at the height of lockdowns, as well as tax deferrals and loan moratoriums, are being extended even as restrictions on movement are lifted. That’s because the sustainability of the economic bounce back is uncertain, with many businesses still closed or serving fewer customers than before.

The outlook has forced officials to set aside concerns over rising debt to prolong their crisis measures, some of which had initially been set to expire this week. The alternative would risk a greater spike in unemployment, spook already cautious consumers and dent the recovery.

“Governments have to tread a fine balance between cutting support and watching the impact on the economy, or continuing the support, perhaps more generously than originally envisaged, and watching finances balloon,” said Peter Dixon, an economist at Commerzbank AG (OTC:). “So its a very tricky balance to strike. Maybe governments underestimated the demand for support.”

Another reason to remain wary is that some places have seen a resurgence in the virus. Cases have surged in the U.S., while the English city of Leicester and some districts on the outskirts of the Portuguese capital of Lisbon have reinstated lockdowns to contain new clusters of the pandemic.

Core to the measures to combat the economic slump were government-subsidized furlough programs, which kept workers in employment. The U.K., Italy, Spain, Austria, Switzerland and Ireland have all expanded theirs through at least the end of August. France has introduced a new version of a partial furlough scheme that companies could use for up to two years.

Germany loosened the conditions on its longstanding Kurzarbeit program to make it easier to protect workers’ wages during the pandemic, and will extend that relief if needed.

In many cases, it’s not simply a case of extending support, but adjusting as the situation evolves. The Peterson Institute last month recommended shifting carefully from funding job retention to wage subsidies to help get people back to work.

It also said the usual reallocation process that allows some firms to collapse shouldn’t apply now. Given the extreme and unusual situation, its view is that protecting businesses and jobs should get a higher priority than normal.

What Bloomberg’s Economists Say…

“Europe’s coronavirus outbreak will be the biggest peacetime economic shock on record — that much is clear. Less certain is how quick the rebound will be and how far social distancing will allow it to run.”

–Read the full EURO-AREA INSIGHT

The challenge of unwinding stimulus is a lesson that’s long been apparent to central banks. More than a decade after the financial crisis, many had barely moved policy off emergency settings. Their efforts to get back to a more normal stance were, on various occasions, scuppered by sluggish growth, weak inflation or market volatility.

For governments, the need to act is so far outweighing any immediate budgetary concerns. There’s also the argument that pulling away the crutch too fast could choke off growth and do even greater damage to public finances.

Italy is a case in point. Even with the debt ratio set to top 150% of GDP this year, it’s extended tax breaks for companies and lengthened its furlough program for workers to 18 weeks from an initial 14 weeks. Rome is considering a further extension, Ansa news agency reported on Tuesday.

While the measures deployed across the region were sweeping, they have their limits, and some industries have been hugely damaged.

The International Monetary Fund forecasts that the euro area and the U.K. economies will shrink by more than 10% this year, among the sharpest declines in the world. Companies including Airbus SE (OTC:), Swissport and Royal Mail (LON:) Plc have announced thousands of job cuts, and unemployment is rising.

That’s keeping the mood cautious even as measures of confidence, retail sales and activity rebound from their lockdown lows.

For governments, the high uncertainty means they’ll probably have to tweak their schemes somewhat on the fly — just as they did when they launched them a couple of months ago.

“As time passes, we will have more evidence and that will be the moment when we can adapt the economic policy instruments,” Bank of Spain chief economist Oscar Arce said. “We have to wait a little more,” he said, “to see what the outlook will be like.”

©2020 Bloomberg L.P.





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