It was a grim day at the office for the global economy yesterday as the extent of the COVID damage was laid bare. Europe’s biggest economy shrunk by a steeper-than-expected 10.1% in 2Q20 compared to the previous quarter. This was the biggest fall since 1970 and wiped out nearly a decade of German growth. Likewise, US GDP contracted by a whopping 32.9% at an annualised pace over the same period. The slump was slightly less than feared but still the worst since government records began in 1947. What is more, this puts the world’s biggest economy firmly in recession after posting negative growth in 1Q20.

Mercifully, a vigorous recovery is pencilled in for the remainder of the year. That said, the US economic outlook is clouded by the current surge in infections. Pockets of weakness have remerged and nowhere more so than the labour market. Disappointing jobless figures showed another 1.43 Americans filed for unemployment benefits last week. This was the second week of rises after a four-month decline. The key takeaway is that the US economy is by no means out of the woods yet. Staying in the US, there was no news on fresh stimulus. Congress is still wrangling over a new COVID relief package. Lawmakers are short on time given that the current aid package expires today.

All in all, negatives were in ample supply for the US President yesterday, so much so that he resorted to distraction tactics to lessen the blow. Donald Trump suggested in a tweet that the November elections should be delayed due to the coronavirus crisis. Yet this bombshell had the opposite impact and spooked investors. Shares on Wall Street closed lower though the downside was capped by blowout quarterly results from America’s tech giants. Oil, meanwhile, was a sea of red as growth jitters put a downer on the demand picture. The two leading crude markers fell sharply to three-week lows but managed to pare some of these losses by the close. Even so, the October Brent contract still settled 84 cts/bbl lower at $43.25/bbl while WTI finished below $40/bbl after shedding $1.35/bbl. Both benchmarks are regaining some ground at the time of writing and are on track for a monthly gain. Nevertheless, upside potential will continue to be in short supply so long as the COVID hangover lingers.

Non-Independence Day    

Donald Trump’s latest stop on the campaign trail took him to the country’s energy heartland in Texas. Top of the agenda was touting America’s energy independence. Surging US shale production helped the US become a net petroleum exporter in September last year. Since May, however, this script has been upended by the coronavirus crisis. US oil production tanked and net crude imports trended upwards. Simply put, America’s road to energy independence has been halted by the COVID-19 pandemic. That said, the last three weeks have witnessed a sharp drop in US net crude imports and a return of America’s net petroleum exporter status, albeit by the slimmest of margins. This raises the following question: one-off or trend?

Despite the recent flare-up in COVID infections, US fuel demand is on the mend. Total oil consumption scrambled above 19 mbpd in the week to July 24 for this first time since March. All the while, domestic crude production has stabilised. Output is steady around 11 mbpd having declined sharply from a record high of 13.1 mbpd in March. Yet the prospect for a meaningful rebound in the near-term is minimal. Drilling activity has declined sharply since the start of the year and spending plans have been slashed.  In view of this, maintaining current production levels seems like the best-case scenario. This new reality has caused many shale executives to surmise that output may have already reached a peaked. “Lower for longer” has, therefore, become the new reality for US crude production. As a result, US refiners will be forced to import increasing volumes of foreign crude for a while yet.

The winds of change are also blowing on the other side of the trade coin. US crude exports have been a bright spot for the US oil patch. Shipments averaged a record 3.7 mbpd in February. Furthermore, they mostly held above the 3 mbpd threshold in March and April even as global oil demand was sent plunging by the coronavirus pandemic. Now, though, volumes are dropping as the retreat in world oil consumption starts to filter through. US crude exports have averaged less than 3 mbpd in six of the last nine weeks, according to the EIA.

Looking ahead, the prognosis for the US crude export machine is overshadowed by several hurdles. For starters, global export markets are set for a boost in supplies from August onwards as OPEC+ gradually reopens the oil spigots. In what may be a sign of things to come, Russia is rumoured to be increasing seaborne Urals crude oil exports by more than 40% next month. Needless to say, this flood in exports will put pressure on US crude shipments. Adding to the lacklustre outlook are deteriorating arbitrage economics. The US crude marker has recently narrowed the pricing gap with its global peers. The WTI/Brent arbitrage is around -$3/bbl, down from -$6/bbl at the start of the year. This shrinking discount has made US crude less competitive in Asia compared to other producers. All the while, another source of concern is China. Beijing is set to receive a record amount of US crude this month but is poised to hit the brakes thereafter as higher oil prices dampens demand. This, in turn, has fuelled rumours that China will likely fall short of its lofty target for buying US energy products this year.

All things considered, the US crude patch faces lacklustre growth prospects and net crude imports are poised to resume their upward trend. The upshot is that America’s energy independence agenda is in tatters. As things stand, the US will not reclaim its title as a net petroleum exporter on a sustained basis for the foreseeable future. This is a striking development given that an energy independent US seemed like a reachable goal at the start of the year. Donald Trump’s COVID headache shows no sign of easing.