Wednesday 22/04/20

1. In OIL NEWS, we look at the slump, rising tanker rates, Trump’s lifeline and why petrol prices at the garage ain’t going down!
2. In CONSUMER & RETAIL NEWS, China gives out vouchers to encourage spending, universal basic income pops up again and Admiral does the decent thing while John Lewis, Primark and Kath Kidston hit tough times and Joules benefits from lounging around
3. In INDIVIDUAL COMPANY NEWS, Coke’s sales go down the plug hole while Netflix and Snap benefit from captive audiences
4. AND FINALLY, I bring you some impressive sandwich art…

So oil has a nightmare, Trump holds out a lifeline and petrol prices stay flat-ish…

Over a barrel: how oil prices dropped below zero (The Guardian, Jillian Ambrose) does a really good job of explaining what happened with the oil price, the meaning of “negative prices” and why not all oil prices fell into negative territory, among other things. As I have said before, at one point on Monday, US producers were paying buyers to take their oil off them because they couldn’t store it anywhere. In short, there’s way too much supply, inventories are almost at capacity and demand is nowhere to be seen. Oil tanker rates soar as traders buy cheap and store (Daily Telegraph, Ed Clowes) shows that prices for vessels that can store oil has gone through the roof. For instance, if you wanted to rent a Very Large Crude Carrier (VLCC) which holds around 2m barrels of oil, you would have to pay $150,000 per day – six times more than it would have cost you a year ago! Buyers have bought oil at low prices and stored it on land and at sea in the expectation that they can sell it for a profit later when the price goes higher – to the extent that there are now over 80 huge tankers floating around off the coasts of Scotland, Texas and other places.

Low oil prices are killing the US shale industry at the moment, so Trump pledges lifeline as prices fall below zero (The Guardian, Jillian Ambrose) highlights the seriousness of the situation as the President has told the US Treasury to develop a funding plan for stricken oil producers. * SO WHAT? * Trump tried to downplay Monday’s move into negative territory as a short-term blip but it looks to me like things could be getting worse before they get better as one of America’s largest oil storage facilities – Cushing in Oklahoma – is thought to be only three weeks away from being full while one of the world’s biggest independent oil storage operators, Vopak, said that other big stores outside Rotterdam, Fujairah and Singapore weren’t far off being full either. Trump added that he would buy up to 75m barrels of oil for the government’s national strategic reserves to help out. John Browne, who was chief exec of BP from 1995 to 2007, said something that will chill oil producers to the bone: “This is very reminiscent of a time in the mid-1980s when exactly the same situation happened – too much supply, too little demand, and the prices of oil stayed low for 17 years”. Browne knows his

stuff, so this is not to be taken lightly IMO. Trump will be doing his level best to make sure WTI doesn’t slip back into negative territory.

Given that the oil price has dropped so much, you may be wondering why the price at your local forecourt may not be going down as much as you’d expect! UK petrol prices to stay steady despite global oil price slump (The Guardian, Jillian Ambrose) says that, despite the weak oil price, you may not see petrol prices dip under £1 a litre. Driving mileage has gone right down during the lockdown, so people are buying way less petrol and diesel than they normally do – which means that the garages that sell it won’t want to reduce prices. Lobby group FairFuelUK says that prices were too high anyway before the outbreak but it claims that forecourts are now making profits of 20.5p a litre on petrol and 18.9p on diesel at the moment versus 13.6p and 14.6p at the start of the year. The lion’s part of the price you pay is actually tax – so I guess the government’s not going to be all that helpful on fuel prices because they earn money on it.

BTW, this is a bit tenuous, but I got to thinking about cars with this whole oil price thing. Given the outbreak, people are driving shorter distances. Doing this is bad for diesel cars because they need to go above a certain distance over a certain speed to “clear out” their Diesel Particulate Filters (DPF) otherwise soot builds up and they have to be replaced (and they aren’t cheap, as I have found out in the past). Apparently, modern diesels are fitted with a DPF and catalytic converter to minimise harmful emissions (from what I’ve found on Google – I am not a car expert!) and some of the main materials used in catalytic converters include platinum, palladium and rhodium. Gold prices have obviously sky-rocketed of late because investors buy gold in times of economic strife as it is seen to be a “safe haven” asset. I have noticed that platinum prices at least haven’t done brilliantly recently and wonder whether they will go up into the end of the year as diesel drivers are forced to replace their clogged emissions systems. Like I say, I am not a car expert and would need to check this out, but it might be worth monitoring (if you are into that sort of thing of course!)…if YOU find out, please let me know! It is at times like these when I was a stockbroker that I would be asking the automotive analysts about car parts and then cross-checking with the commodities team to see whether I had a robust story to go to the clients with. Where’s an autos analyst when you need one, eh 🙄?!?

China distributes vouchers, universal income comes up again and Admiral pays customers while the high street continues to be a bit of a mixed bag…

Many consumers the world over are caught like rabbits in the headlights at the moment, either because the amount they can spend has reduced or because they want to hold off on purchases for the time being. China doles out vouchers to encourage shoppers to spend again (The Guardian, Zoe Wood) shows that local authorities are doing their best to think of ways to help consumers to get back into the spending habit once more. Some cities are encouraging two-and-a-half day weekends and Communist party officials are being told to lead by example by spending and shopping. Suning, a major electronics, clothing and food retailer gave out £70m worth of vouchers to shoppers and Tencent has launched “buy now, pay later” functionality on WeChat. We’ll just have to wait and see whether this is successful or not!

Talking of putting money into consumers’ pockets, More than 100 UK opposition politicians call for universal basic income after lockdown (Financial Times, Jim Pickard) shows that there is a growing chorus of voices calling for the government to make regular payments to all adults in the country to head off an even worse economic crisis once the lockdown ends. At the moment, Sunak is saying that he believes that the existing universal credit provision is enough, but things will get more difficult once the current government support measures end. * SO WHAT? * So far, we have seen countries like the US and Japan give their citizens one-off payments of around $1,000 and I know that the concept of a universal basic income has been raised from time to time in various countries, but it has always been voted down. This is a tricky problem, but I wonder whether universal credit payments could give the government a realistic picture from which to gauge the potential future cost of such a system. Whatever they come up with, it is likely to be very expensive.

Then in Admiral to refund £110m of premiums as drivers stay at home (Financial Times, Oliver Ralph) we see an insurer getting some positive press for a change as it has become the first major British insurer to refund premiums to all of its customers to acknowledge that people are driving less during the lockdown. In practical terms that will be about £25 per vehicle, equivalent to 5% of the average annual motor insurance premium as at the end of last year. * SO WHAT? * This has already been happening in the US with companies like Geico, Allstate and State Farm returning billions of dollars to customers and will no doubt put other British insurers under pressure to do the same.

Meanwhile, the UK high street continues to suffer. John Lewis and Primark furlough tens of thousands of staff (The Guardian, Zoe Wood and Sarah Butler) shows that, combined, the two retailers have furloughed over 80,000 staff. 14,000 of those are at John Lewis, which is also making major cuts to its spending plans. Associated British Foods, which owns Primark, announced that it had furloughed 68,000 workers worldwide and written off stock, including Euro 2020 merch that is unlikely to ever sell, worth £284m. Despite its suffering Primark will resist going online despite shutdown (The Times, Ashley Armstrong) shows that the company is going to stick to its guns and not sell online, despite suffering this time around because of its lack of capability in that area. Kath Kidston quits high street and puts 900 staff out of work (The Times, Ashley Armstrong, Louisa Clarence-Smith and Alex Ralph) gives us news of the inevitable as it signed an insolvency deal that has shut down all of its 60 shops across the UK. It was sold back to Baring Private Equity Asia in a pre-pack administration. The company will continue to trade online and in overseas franchise operations. The tough times continue for British retail. Having said that, Clothes for the great indoors give Joules a lift (The Times, Ashley Armstrong) shows that at least one retailer is doing OK during the lockdown as online traffic and sales were all running above expectations despite all their physical shops being closed as part of the lockdown. The company’s share price shot up by 25% as investors took this as a sign that things might turn out OK for them when coronavirus restrictions are eventually lifted.

Coke’s sales underwhelm while Netflix and Snap benefit from captive audiences…

Coke sales volumes down 25% as bars and stadiums close (Financial Times, Alistair Gray) shows how the lockdown is adversely affecting the beverages giant as sales volumes fell by a quarter this month but Netflix adds 16 million new subscribers as homebound consumers stream away (Wall Street Journal, Joe Flint and Micah

Maidenburg) and Snap revenues soars with users stuck at home (Wall Street Journal, Georgia Wells) show that captive audiences are working well for some.* SO WHAT? * Netflix says that production shutdown consequences won’t be too bad over the next three months, but if producers and actors aren’t allowed to do their thing it may start to get problematic. At the moment, it is rushing to finish shows that are in their final edits and buying other content from third-party suppliers (along with everyone else, I suspect!). Snap impressed with a surge in growth and revenues over the first quarter despite everyone expecting ad revenues to be hit. Facebook and Alphabet are yet to report results, so Snap’s upside surprise could be a sign of things to come from the others.

And finally, in other news…

It could be argued that this is a project for people with weird tastes in sandwiches and/or for people with far too much time on their hands but How to make amazing Japanese fruit flower sandwiches (SoraNews24, Oona McGee https://tinyurl.com/ydhprsd2) is still quite impressive. Bizarre fillings, though…