A world drowning in oil
ONE could barely believe the reports when the May price for West Texas crude oil dipped into historic negative territory late on Monday.
The immediate thought was: does this mean free petrol for my gas-guzzling car? And will all those friends who stealthily escaped to the country for lockdown, enjoy the munificence of free heating?
That is unlikely. The impacts of hedging activity, high taxation of fuel in the UK, green levies and all the rest means that feather and rocket energy pricing (slow on the way down and fast on the way up) is likely to persist.
It is too simple to just dismiss the minus$40.32 price per barrel as a quirk created by a lack of oil storage in Oklahoma. Covid-19 has brought into sharp relief several market factors. The scale of US shale production now, even if some of the smaller drillers go bankrupt, means that the world is in uncharted supply territory.
A rare show of international co-operation by Donald Trump may have persuaded Russia and Saudi Arabia to cut back global output by 9.7m barrels per day but no longer can producing countries set market prices. Those outside the Opec remit include the US, Canada, Brazil, Mexico and Norway, all of which can keep pumping.
A fall in oil prices used to be considered a good thing for global markets and the economy. For many industries, including air travel, motoring, leisure and most manufacturers, it would be regarded as a demandboosting tax break.
Covid-19 makes that less true because requirements for energy have fallen off a cliff. Even though Brent crude, held in tankers off the coast of Europe, may yet achieve better prices, we should not discount the disruptive impact.
Britain’s marginal North Sea oil producers will be lucky to keep afloat. In the developing world, from Nigeria to Latin America, the shock will make debt problems – exacerbated by capital flight – even worse.
The oil majors always have plenty of fat to cut in terms of capital investment which allows them to smooth out cash flow differences between quarters and years. That is why UK shareholders (barring one-offs like the Deepwater Horizon catastrophe) can count on big oil to pay dividends when the rest of the world has stopped.
The glut will not last forever but if recovery from coronavirus is not the dream that ‘V- shaped’ bounce optimists hope for, then pension schemes and investment funds could still be out of the money.
No wonder stock markets reacted badly.
How Weston won
CONFRONTED with huge cash outflows at the start of lockdown, Primark owner ABF dealt with the problem head-on.
It cancelled orders with suppliers (most on a 30-day payment basis), stopped paying rent and furloughed staff.
As a result, chief executive George Weston and the group took some flak and the company has had to do some repair work with Bangladeshi suppliers. Investors will be relieved that it has managed to limit the outflows to £100m a month.
Weston can also see light at the end of the tunnel with the cautious end of lockdown in Austria, but he thinks it would be a big mistake for the UK to jump early only to have to shut down again. That would be a blow to confidence.
What might have been missed in the focus on lockdown is the way that ABF has kept its food milling operations going, which in turn means no poultry panic in the fresh food aisles. In Africa, ABF has had to navigate huge queues at borders as it seeks to bring in the cane harvest.
Primark has been the growth engine for investors but, in the age of Covid-19, food supplies will be the great stabiliser.
Giving back
AS THE most significant hotel operator at Heathrow and biggest landowner in area of the airport, the Arora group, the creation of entrepreneur Surinder Arora, is having a torrid time.
That has not stopped him from giving back to the country which gave him and his family, originally refugees from the Punjab on the India-Pakistan border, a home. At Heathrow, flight crews and medics are being accommodated at his Renaissance hotel.
NHS staff assigned to the Nightingale Hospital at the Excel in London’s Docklands have been offered the hospitality of the upmarket Intercontinental. Nice work.