OPEC Can't Fix Oil Demand Destruction: KPMG's Mayor

is what the market is discounting. When you take a look at oil, you see that as well. W T I and Brent both down over from their highs, reflecting the concern about global growth. Opex trying to respond today announcing that they will they look to reduce output by one point five million barrels. I get the latest. We welcome Regina Mayor. She's the global energy head for KPMG based in Houston. Regina, thanks so much for joining us here.

Give us your sense of kind of the opeque move here that one point five million barrel cut to output. It's noted that Russia Mayor man May not be supporting it. So you're right. The market is in free fall around crude price, and it's very substantial. We're seeing significant demand destruction, and current projections are that global demand will at least be flat and potentially negative, and that would be only the fourth time in forty years that we've seen global

demand go negative. So OPEC is trying to take decisive action to stem the tide. If they do the one point five million barrels per day, which has not been agreed to by OPEC, plus and Russia being a key constituent there, that would reduce supply by three and a half percent, which would be roughly in line with flat demand or even slightly declined demand, which hopefully puts the

market more imbalanced. But right now, the market seems to be shrugging off the decisions that were even made today, and they seem to be unimpressed by the actions that

have been taken Regina. Earlier this morning, Jeff Curry of Goldman Sacks came on Bloomberg Surveillance and was talking about how he expects oil prices to fall and I'm talking Brent could fall to or even below barrel this year in terms of the expectations of growth to you agree, I do not agree that will will go that low, but I did not believe that we would be in this territory. So without decisive action tomorrow, it could potentially

be forty. I would say for w T, I think I find it hard to see a scenario where Brent dives below forty. But we don't know what's happening with the coronavirus, and the market is incredibly jittery and not very rational right now. So, Regina, there was some news out earlier today that XN is slowing the pace of its flagship shale project in the Permian basin. So obviously this raising more concerns at the folks in the Permian having a tough time at these oil levels. What are

your clients telling you right now? They're saying, it's still stay the course, uh, steady as we go, And I think the very large companies have made bold moves to reassure investors. We're putting we're focusing on the dividend, we're guaranteeing the dividend, we're focusing on value, We're keeping capex in line with expectations. They're hopeful that this is a four to six month process and we'll ultimately see ourselves

wash out of this. And in the end, we have to make these these big decisions because these are long lead time efforts. If we stay in the Permian, there are players that operate more on the brink, and the larger players are hoping perhaps that they'll get some of those other players out of the market, which bodes well for future Permian activity. How significant will the bankruptcies and this shall patch be this year? I anticipate that they

will go up. We need to see consolidation. There are still too many fringe players and the checkerboard of acreage is still too patchy. Um. The bigger players are consolidating and they can operate more effectively, but there are moves that need to be made going down into the forties that could drive more of the bankruptcies, and I anticipate that that should chick up. So Regina, overall, let's assume we are facing no lower demand. Um, what else can OPEC do on the supply front? Can they take it

another level? And how critical is it having Russia as a part of this. It's absolutely critical that Russia is a part of it. Um. That's I think what the market is waiting for and I don't think that they can do a whole lot more, which worries me, and we're probably the Goldman Fort scenario comes into play because you can't just keep cutting cutting um. The market is not responding to that. What we really need to see is demand coming back, and some of the indicators that

I would look for is a return to shipping. So we have idle manufacturing capacity, we have product that's in containers waiting to be shipped, we have ships there in quarantine. Once we start to see the supply chains move more effectively and we see travel restrictions lifted and some of the self quarantine activity uh run be taken off, then demand comes back, and that I think will be the thing that booies the oil price for the longer period.

There's a question about the elasticity of the market, just how quickly oil producers can ramp up production if things get back to normal. Is there concerned that there could be a whip saw here with the oil prices diving and then jerking way back up as people start to uh generate some of the same trade and the same travel that they had before and without the inventories the oil production supply chain and production process cannot move as

agilely and as quickly as that. So while some may say they're slowing down production, I don't actually see that having a material effect on declining production. To have that whip saw effect. If they could, they belly would, But it's not. It's not. You're not able to respond to that rapidly, So I don't see that forecast. Regina Mayor, thank you so much for being with us. Regina Mayor, Global Energy head at KPMG based in Houston. Let's talk

about volatility. Looking at the VIX index right here, thirty six point zero seven. That's up four points today. This thing just recently a few weeks ago, down around twelve thirteen. Incredibly higher risk being priced into the market. And we talked about market volatility. Is absolutely nobody better to do it with than Nick call Us, co founder Data Trek Research. He joins us here in a Bloomberg Interactive Broker studio. Nick, thanks so much for joining us. Are you how are

you thinking about the volatility in this market? Is whether you should be buying or selling? Here? At most people it just scares the heck out of them. Well, it is scary, and that's a very very logical response, at least an emotional one. If you look at the vix spect and look at where it kind of levels out and where it creates a buying opportunity to three levels that really matter forty two, fifty and fifty eight, because that's three four and five standard deviations from the long

run mean. I hope Tom Keene is listening. So those are the levels, and it's worked beautifully so far. On Friday, during that really cataclysmic low around to one or two pm, it hit forty nine right on top of four standard deviations, and so that was so far the bottom. So what we're telling clients is, if you want to trade this this this tape, look for those levels and don't even try until forty two and pr to kind of stick

your toe and even deeper at It's interesting. For a long time, the low interest rate environment was said to be dampening volatility. Not so this time. No, Because the low estreating environment was coincided with a low volatility of

GDP growth, a low volatility of unemployment. Those numbers were getting better or at least flat for a long period of time, and now we have this shock that says we have no idea what happens next, and then implied volatility rises because the volatility of future economic reports going to be volatile as well. So, Nick, what did you make of the Fed rate cut intra meeting rate cut

earlier this week? Panic or wise? You know, it comes down to, I think you got to read the Beige Book yesterday, because the Beige Book had fifty you want to say, fifty seven mentions of coronavirus or COVID nineteen, which is higher than the thirty eight mentions that Tariff scott last year when they began to become a real issue. And I think you know, chairp How is a big

fan of that Beige Book. He reads it and so I think he probably looked at the draft over the weekend and said this is going to be just as bad or worse as the trade war. And that's what engendered this, this fifty basis point cut. Right now we're seeing Fed funds futures price in another fifty basis point rate cut later this month. What will that do in terms of stock valuations, in terms of volatility? I mean,

the feels like the answer is very very little. I think it's the case where you know, the FED is on the ship and guiding it and it sees the iceberg ahead, and maybe it's too late to swerve, or maybe it's not that you gotta try. You gotta turn the wheel as hard as you can and hope you miss it, or I hope it's more of a grazing blow. I think that's the best that can hope for, and

I think realistically they know that. So Nick, you know, one of the things at least I talk a lot about is, you know, the interest rate market in a two year point zero point five eight on the two year, the ten year back below one. What does this tell you? You tell you that question, as our clients have asked that question more often than what does the volatility means? They view the volatility is sort of a function of

the virus, and that's probably right. They view the move in the ten years, perhaps we're learning something more structural, and they worry that America has kind of seen its best days, that economic growth is going to be very slow, structural GDP growth will be slower, inflation is going to be non existent. We're gonna end up like Europe and Japan. And that is the big warrior. My counter argument is

that we're not going to end up that way. That we still have, you know, a fairly strong economy, a really strong tech sector, and all the things that create long term economic growth. But it is a huge source of concern, far more than I would have thought going right to that point with tech. What are the levels at which you buy oh? So the you know, the way we look at it is tech is the most volatile part of the market, and so you have to basically think about where the market can go and how

bad it can get. And they are not to go back to the standard deviation math, but a five percent down day is a five standard deviation move. That is the kind of levels where you get real panic, and we outside of oh eight, we've never really seen it for a very long period of time. So the bottom line is, if you want to trade tech, you wait for a big, big down day, a down five percent day on the SMP where tech is down seven, eight, nine percent, and that's the kind of low that you

can safely nibble away at. So if it goes down nine percent more from here at Facebook in a day, Google in a day, you're in there buying interesting. So as we think about the market here. I mean, are you thinking about we are in fact in a you know, you know, not a stagflation, but a lower growth for longer. Is that kind of your base case here over the next several years? It is strongtly the base case for

at least the next year or two. You know. I think there were early on back in January, which feels like a thousand years ago, there was a hope this is going to be a V bottom kind of event. We look at Chinese pollution and traffic congestion data to get a sense of how quickly the Chinese economy is coming back online. The good news is morning and evening rush hour in the five biggest cities is now getting back to normal. And in Shenzen, which is really important

for tech, it's back to normal. Pollution is getting back to normal. But we can traffic still very slow. Midday traffic still very slow. So this isn't going to be a V bottom. It's going to be a slow grinding improvement of higher not just for the US but everywhere in the world. I was reading a Project Syndicate column by Harvard professor kind of throw Off last night, and he was talking about how This is fundamentally different from other issues that the Fed and Central banks globally have

dealt with. And when we talk about, you know, the idea of rate repression, we talk about no inflation. This time he was arguing, could be different because the disruption is on the supply side, not the demand side. When you have a disruption and supplies the demand is still there, that means prices get bit up and we could end up in a nineteen seventies like situation. Do you give any credence to that idea super smart guy, so you can't just blow it off. But I'll tell you, I'll

give you, you know, two anecdotes. The first is the China traffic One. China consumer is not back. There is no consumer demand in China to speak of, for all the obvious reasons. Walking across town from from the West side of Manhattan this morning, I was able to jaywalk across Park Avenue in the middle of the day because there was no traffic for a block and a half.

It just says that normal midtown traffic, which is usually quite heavy, is extremely light in New York and that could be a function of tourism, which is obviously down. It could be a function of work from home. But I can tell you haven't lived in New York my whole life as you have. Looks very light out there. It's not quite back to oh eight levels, but it is light. What is your sense of how long will

take the cycle through the U S economy? I mean, because it's the V is probably out of the discussion, as you were suggesting. Yeah, the V feels like it's off the table for now, and it feels like it's three to six months, three months being kind of dragging your way down towards the bottom of whatever happens, and

then three months coming back. And I think there's a piece of this that really revolves around holiday and Christmas as well, both from the supply and the demand side, because if you do get an economic shock, then you do have a different picture going into holiday and as well as the elections. So unfortunately, this touches on every single topic investors care about. Nicholas, thank you so much

for being with us. Nicholas is co founder of data Check Research, joining us here in our interactive broker studios. We are looking at markets pulling back a little bit from their earlier lasses still solidly in the red and the question for a lot of people is not just when do I buy the dip, but when do I even get involved? How do I even understand when to make allocation shifts into response to this news, Barry red Holds joins us now Bard Holds, founder of Widholds Wealth

Management and a Bloomberg opinion columnist. Barry, I know what your advice is, sixty forty, keep it in long term boom.

But I have a question for you, based on what is going on currently right and that is how much do we have to bring down our earnings and our dividend expectations for the S and P five hundred at this point given what we're seeing with respect to some of the guidance that we're getting out of airlines, out of entertainment companies, out of gaming companies, Sure anything involving travel tourism go down the list. The more challenging aspect

that's easy airlines kind of to zero. They're they're gonna have their profits, are gonna be for the quarter, are going to really be pressured. The bigger question that I think we have a hard time answering is what about the global supply chain. Already there have been rumors of an inability to replace iPhones from Verizon and A T and T because the shipments are down. So the bad news is, we don't know how severe this is going to be, and we don't know how long it's gonna last.

The good news is every time we've seen one of these over the past century, it has its impact, it lasts, say a couple of quarters, and then on the other side, with things go back to normal. Today we have a double bled sword. On the one hand, we can develop tests to see if you're positive or negative much quicker than we have were able to do before, and theoretically will come up with a vaccine for those of us who actually believe in things like science and vaccines, much

more quickly than we used to. The flip side of that is technology spreads information and misinformation about this, which leads to panic and fear. I don't think you would have seen a week like last week half a century ago, because the relentless drumbeat of panic and fear and info and miss info just didn't exist in that same way, and so we would not have had that immediate emotional response.

You still may have ended up down twelve, but it would have been over a couple of quarters as we actually saw it work its way into earnings instead of work its way into the fear of earnings. Barry, what did you make of the Fed's action earlier this week the fifty base? His point cut was that panic? To you? Was that then looking too much at the markets? Or do you think the underlining data supported it? You know, the data suggests that we're going to have a demand

side slowdown. That's all the all the different sectors at least was talking about. That's there. Nothing at all is suggested suggesting if only rates were lower, I would go to Disneyland. If only rates were lower, I could go to the Facebook Developers Conference, or the New York Auto Show or anywhere else, any of these other big events

that are being canceled. So it seems that we have developed this unfortunate habit of responding to situations with a monetary solution when it really calls for a fiscal solution. And the old joke is to the man whose only tool is a hammer, everything looks like a nail. We seem to have a band in the traditional Keynesian response

to diminish demands for goods and services. Hey, when the private sector slows down, the government should step in uh with either tax cuts or or spending or both to temporarily replace that demands, assuming you want to cushion the blow of the slowing economy caused by this sure and we can talk about what they should do. What they are doing and what they're expected to do is another story.

And currently looking at Fed funds futures just more aggressively pricing in lower rates sooner to full rate cuts currently being priced into Fed fund futures for the meeting on March eighteen, in less than three weeks, coming up after their five fifty basis point emergency rate cut, the first that they've done inter meeting since two thousand and eight and since the crisis. Then it raises a question what

does it do? Does its support equity valuations anymore, especially if the response is to something that we cannot evaluate right now in its face. We don't know how much it's going to bring down earnings, We don't know the relative valuation case at this point. Is this the time when we see that relationship lower rates pushing up this sort of risk to you know, they search for for yields. This this flight to risk is that connection broken. I'm not sure if it's broken. What what seems to be

going on? And this is I have access to the same information that you do. I'm not speaking to fit insiders. I don't know what they're talking about. I do recall them saying a long time ago, I think it was January, that they're concerned about negative interest rates. We heard that throughout Well, if you want negative interest rates in the United States, hey keep cutting uh federal funds rates. If you drive that low enough, eventually your worst nightmare will

be here, which is negative interest rates. So I don't understand. Are they responding to presidential pressure? Does the Fed have the same sort of unhealthy obsession with how high the stock market is that the president does. It's hard to judge. From the outside. It looked like panick to me. And

it also looked like the wrong um prescription. You know, an aspirin isn't gonna cure um a common cold, and and this sort of viral infection is going to have an ongoing impact on demand that we have no idea how big it's going to be cutting rates, talk about pushing on a string. How are cutting rates going to have a positive impact on this, it's it's really really surprised. You know. I was speaking with Jim Bianca earlier this morning.

I love his world well, and one thing he said is that there is actually a fundamental plumbing issue that as people the repost side or and I mean that that's well known free how long over a year now, but that basically, uh, that that people have been pulling their cash out of markets. That basically cutting rates will

help ameliorate some of the plumbing issues. If you have a problem with the repo market because of a lack of liquidity, as we learned in the aftermath of eight oh nine, the solution is to flood that market with additional liquidity. I don't think rates make all that much of a difference. I think they have an ability. The FED has an ability to take a market that is I don't want to say frozen, but creaky. Remember the eight seven crash was caused by plumbing issues, uh, within

the market structure. I mean literally, Um, this is really a much more narrow little niche hopefully less systemic than what we saw in eight seven. But the FED is aware of it. We know how to fix it. We just did this a decade ago. None of it has to do with rates that by any historical measure, are incredibly low and very accommodative. So I don't understand the FED and their hammer. Everything apparently is in now. Barry Ridholtz, thanks so much for joining us. As always, Buries a

Bloomberg opinion columnist. He's also host of Master's in Business on Bloomberg Radio. When we talk about the disruptions to business in the wake of the coronavirus outbreak, we really have to focus on the airline industry, in particular the fact that there is a new estimate that more than a hundred billion dollars of revenue will be taken off the top line of airlines given the coronavirus outbreak. And for more details, Brendan Case joins US now Industrial, Aerospace

and Chemicals Team leader for Bloomberg. Brendan how are airlines responding to this so far? What they're doing is moving very quickly to cut costs. UM United and Jet Blue have announced that they're going to trim flights in the short term. UM and I think we'll probably see a lot more of that. Jet Blue was in fact very explicit about the need to preserve cash, which it's certainly not a phrase that you would have expected the airline

industry to be using just a couple of months ago. Um. This is an industry that has been consistently making a lot of money after all of the consolidation that it went through over the last decade UM, and now all of a sudden it's facing uh, you know, a very very big crisis. So Brendan, it's interesting here how much can and how quickly can these airlines cut their costs to offset uh slowing demand on from consumers. Well, they

can certainly do things like pair their flight schedules. They can they can stop flying some planes um and and and they'll have a bit of a cost break on on jet fuel, which which also because of coronavirus, has been going down quite a lot in price UM. But what they can't do is rest onto a situation where, um, where people just aren't flying. And we don't have a

whole lot of of of great data about about that yet. UM. But you know, this is an industry that has said that it's ready for something like a recession, which would you know, entail certainly a consistent sluggishness in demand. But I think what people are are wondering about now is just how sharp the drop in bookings will be over the next the next few weeks, in few months. Is anyone talking about actual insolvencies. That seems like a little

far fetched, especially in the US. Certainly in Europe you're already seeing it with with Flyby going into administration today. In Great Britain. There's also certainly other carriers such as Norwegian and Alatalia that have been financially weak in recent months. In the US, though, um, you've got that, You've got an industry that is dominated by four or five really big carriers um and at this point it seems like barring,

you know, a situation that drags on and on. Um, you've got companies that that in theory at least should have the sort of the wherewithal to to to to web of the crisis. But again it depends on it depends on how it shapes up. So Brenda, we've been seeing headlines really over the last week or so about corporations severely curtailing business travel. Have the airlines also seeing material cancelations just from consumers, vacation goers, that type of thing.

That's one of the questions that were very keen to learn more about. UM. Certainly their comments about a sharp drop in demand over the last twenty four hours would indicate that that's the case. UM. We don't have a whole lot of insight about that, though certainly you know we're in we're in the spring break timetable, and the airlines are already already getting ready, uh for the summer, the summer travel season. UM, But we don't have a

whole bunch of data on that so far. The way, we do have data on the business cutbacks that you mentioned, which which last night, by the way, UM, you know Boeing joined those ranks, boat Bowing said it would it would curtail a lot of non essential travel and and rely more on on video meetings. UM. And so there you have. You know, what are the airline industry's biggest suppliers saying there's gonna be less travel for our guys too, Brennan. We've seen the share price of some of these airlines

absolutely tumble. How much more does it have to go? When you speak to analysts, UM, you know, there was a no doubt this morning from Bernstein that was saying that it seems like the shares have may be sold off a little bit too much if you if you posit that this will be a relatively temporary disruption. Um. The big question though, is you know, if you have a situation, let's say three or six months from now, where people are staying home, schools or clothes, nobody's flying. Uh,

it's really anybody's guess how bad it could get. Brendan, is there any indication from the companies that are considering layoffs? Um, well, they haven't used that word yet, but United did freeze hiring. It also halted any pay increases for management employees until July, and so certainly you're starting to see some indications that things could head in that direction if it gets bad enough. Brendon,

thanks so much for joining us. We appreciate it. Brendan Casey's Industrial, Aerospace and Chemicals team leader for Bloomberg News, joining us on the phone. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyd's I'm on Twitter at Lisa A. Bramwoit's one before the podcast. You can always catch us worldwide on Bloomberg Radio