Oil Price War Ends With Historic OPEC+ Deal to Slash Output

Posted: August 26th, 2021

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“Oil Price War Ends With Historic OPEC+ Deal to Slash Output”

The article authored by Bras, El Wardany, and Smith is about recent decision by world’s largest producers of oil to end pricing wars occasioned by the prevalence of Covid-19 pandemic. The prevailing oil pricing wars could severely disrupt the global economy. The authors regard the recent historic decision to cut oil supply by a tenth of the most recent volume as insufficient in mitigating the negative effects of the global pandemic(Bras et al. 1). Bras et al argue that the involved bilateral and multilateral talks in the video conferencing of the OPEC plus the G20 countries are regarded as the most unprecedented move ever experienced in the past 20 years (Bras et al. 1). Hence, the decision to cut supply of oil seemed an uncertain move due to the uncharacterised market shift in the global economy.

However, the views about the move has elicited varied opinions amongst the energy consultants. Whereas some have considered the OPEC and alliance’s agreement as sceptical, others have seen it significant as a way of resuscitating the previously stalled associations inside the OPEC. In a colossal agreement to cut the supply of oil by 9.7 million barrels a day, Mexico and other countries had resisted the move. Conversely, President Trump, U.S.took the initiative of entreating other world leaders like President Putin, Russia and King Salmad, Saudi Arabia into a compromise. As a result, the world has perceived the OPEC to have been alive again. Therefore, the oil producing countries in the G20 finally agreed to undertake remarkable oil output reductions as a measure of complimenting the efforts of the OPEC.

Consequently, with the price of oil barrel reducing adversely from $70 to $20 in 3 months, Bras et al and other pundits have expressed unyielding concerns about the future of oil market equilibrium (Bras et al. 1). Surprisingly, Covid-19 has led to a short, drastic implication on air and ground travel that would take years to recover. For example, Brent futures, which had shortly jumped to 8%, has not slumped off to 2%, thus endangering the huge shift in the global market. As much as the OPEC plus its alliance have undertaken Oil cuts, the move is regarded too late and too little for the following two reasons (Bras et al. 1). First, the OPEC decision did not take immediate effect just upon the onset of Covid-19 until 1^st of May. Hence, thisimplied that the daily barrel cut would not be sufficient to offset the lasting effects of shortages in demands for oil in 2 years. Second, with the decision having taken effect in May 1 after a three-month of pandemic, some OPEC plus the alliance had reactively increased productions in just a month. Thus, the resultant effect may relatively be minimal.

Besides, Kuwait, UAE, and Saudi Arabia agreed to cut the 2.7 million barrels they had initially planned to pump into the market. Although these totalling up to 10 million barrels, it would not be sufficient to offset the anticipated high levels of shortage demand at 19 million. All these production cuts were meant to restore the stability of the oil market. Apart from this, the extended number of lockdowns, horrifying increase in the number of deaths, and decreasing unemployment rates in US have amplified the shortage of demand in oil to 20 million barrels daily in April (Bras et al. 1). Therefore, Bras et al have stated that OPEC, G20, and other energy and economic consults are now more concerned with consumption rather than oversupply in the oil market.

“Banks Prepare Themselves for a Wave of Loan Losses”

The article is authored by the NY Wall Street. It discusses the short earnings in revenues that have been attributed to the reactions of the world against the onset of Covid-19 as health workers do their best to look for a lasting solution (The Wall Street).In response to the economy, the article states that investors have dumped stocks, and thus resorted to bank deposits. Likewise, most businesses have resorted to loan borrowing to help continue their operations. Moreover, the increase in number of laid-off workers would relatively translate to increases in mortgage defaulters (The Wall Street). As such, all governments globally have responded by implementing a stimulus economy package meant to pump monies in the economy via the commercial banks.

In analysing the effects of these economic responses, the article briefs on the increased earnings recorded by the banking sector, which has resulted from increased levels of credit facilities. For example, JPMorgan Chase and other banks have recorded a sharp swelling in their balance sheets coming from new deposits, where customers borrowed money for largely transactional purposes in the first quarter. The outstanding loans at JPMorgan, Citigroup, Bank of America, Goldman Sachs, and Wells Fargo have increased from $3.8 trillion to $4 trillion in 2019 and 2020 respectively. The increase in credit facilities have been amplified by the recent credit-card buying at supermarkets during April 14 and 15. Besides, these banks have recorded a short increase in revenues from 28% in 2019 to 32% in 2020 (The Wall Street). Thus, the same trend is speculated to be sustained.

However, the Wall Streetanticipates that such short increase in earnings in the banking industry would soon reshape differently. The levels of trading activity would reduce due to the effects of the lower interest rates eating into the interest margins(The Wall Street). With increased credit facilities in public coupled with lockdown, the bank sector is expected to record high number of loan defaulters. Therefore, the banking industry has responded by initiating large credit provisions as a way of bracing up for the anticipated losses. For example, the four largest credit lenders in the US have recorded $24.1 billion in 2020 as compared to $18.7 billion in same quarter of 2019 (The Wall Street). Such huge provisions for credit facilities would diminish the income statement in respect to the reduced net earnings at $10.1 billion in 2020 from $27.1 billion in 2019. Notably, the Wall Street argues that many bosses of large banks have constantly expressed their apprehensions towards the inability of an economic model to predict the GDP and high unemployment levels. For instance, they seem unsure of whether the economy would prompt them to increase the provisions of credit in the future. Therefore, the recent record of $6.9 billion by JPMorgan during the first quarter of its financial year could easily be defaulted.

While reflecting on the worst case of a financial crisis of 2008/2009, the economic experts predict that JPMorgan might record $45 billion in losses due to default in credit facility.The bosses of the banking sector cannot rationally model the effects of this pandemic to intervene the implications of an anticipated 40% reduction in GDP and its relative levels of unemployment (The Wall Street). With varied interventions by governments and health sectors, the bank industry has been left with limited actions to model effectively as the first quarter of the FY has effected 0.6% increase in the credit provisions. Thus, the bank bosses do not actually recognize how much they would have to set aside in future as a measure of curbing the losses in net earnings.

“What the Bond Market Is Saying About Investors’ Hopes”

The article on the New York Times by Matt Phillips discusses the slumping off of bond yields and the rising levels of worries among investors. Whereas the decrease in short-term bond yields imply future hopes, the writer signifies the negative implications of reduced yields of a long-term bond in the future (Phillips 1). Therefore, effects of a shift in bond yields in an economy is two-sided. In this case, it can either be hopeful or worrying to the investors. The recording of a fall in bond yields by S&P 500 from 11% to 4.6% implies its rather slow reactionary implications as compared to its counterpart, the stock (Phillips 1). Indeed, the onset and prevalence of Covid-19 have severely affected the bond market, thus sending worrying signals to the investors. In the same way, the investors have expressed mixed feelings of hope as they expect the Federal Reserve to initiate some superpower actions and encourage economic expansions.

Currently, the investors care much about the prices of bonds. Whereas the pricing of long-term bonds are affected by rates of inflations and economic growth, the short-term ones seem otherwise impacted by the Feds’ monetary policy. As such, the prices of long-term bonds depend entirely on the stability of the US economy. Therefore, the US treasury should initiate debt borrowing by use of multifaceted securities which have different maturities. For example, the US government need to float the bonds, ranging from one-month to 30-year maturity (Phillips 1). The article briefs on how the actions by the Federal Reserves have impacted the expectations of the investors highlighting the fact that increased prices of a bond lowers its yields(Phillips 1). According to the Matt Phillips, the floating of government bonds play a key role in determining the costs of borrowing for lending corporations, thus further impacting the consumption levels(Phillips 1). The statement is evidently correct in the way the yields on US Treasurynotes influence the rates of interest on a 30-year mortgage (Phillips 1). Notably, the prevalence of Corona virus pandemic has sustained negative implications on the economy, leading to recently recorded falls in yields of bonds. In the first half of the month of March, the writer has argued that the 10-year Treasury bond that has been greatly traded to avert many economic conditions seemingly recorded a low of 1.33. Hence, such a low yield was once experienced in 2015/2016 economic slumping.

The dropping in yields of long-term security bonds to lows at 1.15 has been attributed to the move by many international investors to undertake safety precautions. On the contrary, Phillips offers a different perspective of the global investors towards the floating of short-term Treasury bonds.Most importantly, he drew the relevance of this kind of yield lows to ever been at the lowest point in 2017 (Phillips 1). The floating of short-term bonds mature quickly, thus driving up prices of the bond in the economy(Phillips 1). In this case, the buyers would prefer investing in case the bond seem highly valued after series of interest cutting by the Federal Reserves.Therefore, Phillips concludes that the falling of bond yields is occasioned by a market perception that the economy would soon fall. When there is a possible fall in yields, the investors would still expect higher levels of falls as bond prices upsurge (Phillips 1). Similarly, the yields in short-term bonds would scale down faster as compared to the long-term ones since the international investors usually anticipate that the Feds would reduce interest rates a measure of boasting the economy. 

Works Cited

Blas, Javier, El Wardany, Salma, and Grant Smith. “Oil Price War Ends With Historic OPEC+ Deal to Slash Output.” April 12, 2020.

Phillips, Matt. “What the Bond Market Is Saying about Investors’ Hopes.” New York Times, March 2, 2020, www.nytimes.com/2020/03/02/business/coronavirus-bond-yields-stock-market.html. Accessed 10 May, 2020.

The Wall Street. “Banks Prepare Themselves for a Wave of Loan Losses.” Dispatch from the Front. April 18, 2020, www.economist.com/finance-and-economics/2020/04/18/wall-street-prepares-for-a-wave-of-loan-losses. Accessed 10 May. 2020.