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Update on COVID-19 and Oil Prices

April 3, 2020

ITR CEO Brian Beaulieu answers some questions from our recent Black Swan webinars, and provides on update on COVID-19 and the drop in oil prices.

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Transcript by Rev

Brian Beaulieu:
Hello. Thank you for joining us for another edition of TrendsTalk. I'm Brian Beaulieu, CEO and Chief Economist of ITR Economics. And I want to answer some questions that have been coming in recently, some of them stemming from the webinar that we have been doing for subscribers and our consulting clients. And one of the questions was why should we trust China's data? They're reporting that there aren't new cases in some of the provinces. Why should we believe them? Well, we are believing them at ITR for several reasons. One, the economic data that the government is releasing is being confirmed by our partners on the ground in China, interactive analytics and by our clients. The clients are telling us that, yeah, this is what's really going on. And both those sources are also telling us to varying degrees that the numbers are on the wane in terms of new cases in China as a whole and therefore that some provinces not having new cases except for where people have flown back into the country. Chinese nationals have come home. Seems to be legit. It all make sense. It ties up. So that is indeed good news.

In fact, we are looking at some trends today that show, we're looking at recoveries accelerating on the way up and new cases are on the decline. I know it doesn't look that way when you read the media reports or see those charts, but when you look at the trends using logs, [inaudible 00:02:01] we're clearly seeing that April is going to be a bad month. Everybody knows that. But we are moving on the better side of this trend in the next several weeks.

Another question is, let's assume the new cases in the US will start declining early April. I think maybe early April is a little ambitious. We probably won't know for sure other than some prelim data until around mid April, but let's say early to mid April new cases are starting to decline and that's probably when the fatalities will be peaking also. So the news will be daily bad in terms of the fatalities, but you're going to have to look beyond that to see what the future really holds and how is this going to affect the market. Well, it's probably going to be good news for the stock market. At least it has a potential to be, particularly given all the money that the Federal Reserve is creating out of thin air. That tends to bolster the market also. In terms of the broader market, it's also good seeing GDP begin to lift off the canvas in the third quarter of this year, particularly as consumers not only exiting their homes, but they're starting to go back on vacations and spending more and more money around their homes and that sort of thing.

So we think it's good for the stock market, but it's even better for GDP if April is indeed the flux month in terms of the COVID-19. Don't forget though that there's still the other black swan, AKA these extremely weak oil prices that continue to have us worried. That means even though COVID-19 may be abating in some regions, some sectors of the economy or geographically speaking, others aren't going to feel this. You're going to see more and more pain in the energy sector. None of the politicians seem to be particularly concerned about it. Our oil industry's never been the delight of the Democrats, and the current Republican party has a lot to be gained by leaving gasoline prices very low. So, we're concerned that these low oil prices could drag on ad infinitum into later on in 2020, and that could depress some parts of oil industry and the frackers and the distributors and a whole host of other folks who make their livelihood supporting all of that activity. COVID-19 is one thing. We're still very concerned about the other black swan, AKA oil. And we'll be watching that very carefully along with you.

Saudi Arabia and the Russians seem to be a determined to drive these prices down, amazingly so as a matter of fact. We are anticipating that by the end of this year, those current very low prices are beginning to move up toward $30 a barrel. And it's hard to imagine that you have to move up to $30 a barrel, but that's the situation we find ourselves in. If you see that those oil prices, which today are trading at a little over $20 a barrel, are indeed trending toward, or maybe even at $30 a barrel by the end of the year, then that's a good sign for the overall economy experiencing more of a broad based diversified macroeconomic lift in 2021. If those prices aren't moving up, oil prices aren't moving up by that time, we may have to alter our forecast in terms of the magnitude of overall GDP's ability to rise. Certainly industrial productions based on what we saw in the 2015, 2016 era.

COVID-19, that's one story getting all the headlines right now, but it's not the whole story. We'll continue to watch those oil prices and COVID-19 along with you and see where these swans are taking us. Thank you very much for listening to another TrendsTalk. I'm Brian Beaulieu, Chief Economist and CEO of ITR Economics. We'll catch you next time.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.