by Ivan Martchev

February 11, 2020

A lot of people are surprised at how fast the S&P 500 rebounded after the initial coronavirus scare, while managing to eke out a fresh all-time high. But what didn’t rebound? The price of crude oil and Treasury yields, which are dangerously close to fresh 52-week lows. Both are extremely economically sensitive investments, and both say that there will be an economic impact from the coronavirus felt globally.

Crude oil has traded a few ticks below $50 over the past week but managed to close above that key level. I think it will take out $50 soon enough and, at a minimum, head towards $42 and perhaps lower if the outbreak is not contained swiftly. China accounts for over 20% of global oil imports and in that regard is the biggest determinant in oil’s price. The second largest crude oil importer is the U.S., at just over 13%.

It has to be mentioned that SARS, another coronavirus that we saw in 2002-2003, did show up in Chinese economic numbers and was followed by a seasonal influenza-type pattern, that is, it spread in the late fall and winter months, but it fizzled by spring time. This novel Wuhan coronavirus seems to be spreading faster than SARS, but that does not mean it won’t follow the same seasonal patterns. Still, with 400 million Chinese under quarantine, the hit to China’s economy and the price of oil is only a matter of time.

SWTIC Light Crude oil

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

One dangerous investment category is that of master limited partnerships (MLPs) in the energy sector in the U.S. They tend to lure a lot of retired investors with their very high distribution yields. Some of those investors think, erroneously, that those yields are safe if they come from pipelines or storage facilities.

While I am sure they are safer in the aggregate than the distribution yields of MLPs that produce crude oil, I must mention that many saw distribution yield cuts in 2015 as U.S. shale oil is much higher costing than conventional oil production. In that regard a rapidly falling oil price affects oil production volumes.

Crude Oil US Crude Oil Porduction

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Crude oil production first peaked at 9.626 million barrels per day in 2015. By the fall of 2016, it had declined to 8.553 million barrels per day. An 11% decline in volumes from the 2015 high caused multiple distribution yield cuts as well as some bankruptcies in the MLP space. The same could happen again.

If the price of crude oil does what it did in 2015 – culminating in the January 2016 low of $26 per barrel – there is substantial downside for the stocks of both integrated energy companies and the more leveraged oil service ones. Both categories were badly underperforming the stock market before the coronavirus hit the front pages of Western newspapers, and they now seem to be ready to take another leg lower.

$XOI Oil Index NYSE Arca INDX

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There is a secular decline in oil service stocks that is rather appalling, as horizontal drilling methods allow for significantly more oil to be produced with much smaller numbers of rigs. The PHLX Oil service Index is nearly 50% below its early 2009 low, when the S&P 500 hit 666, while the S&P 500 last week hit an all-time high of 3348. The OSX index is better than 50% below its January 2016 low, when oil hit $26.

What About Treasury Bonds?

The 10-year Treasury bond yield closed last week at 1.59%, just 16 basis points above last summer’s low of 1.43% and 28 basis points below its all-time low of 1.31%. Depending on how bad this coronavirus scare gets, we may see an inverted yield curve, like we did last summer, as well as new 52-week lows or new all-time lows in Treasury bond yields. Those are completely within reach.

US Government Bond 10Y Germany Governement Bond 10Y

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It’s too early to call for negative Treasury yields in the U.S., as they are primarily a function of European Central Bank policy when it comes to Germany and many other countries under ECB supervision. But someday, we may see U.S. Treasury yields in negative territory due to the willingness of the Fed to employ unorthodox monetary policy tools in times of crisis. Still, if negative interest rates did not help much in Europe or Japan – and decimated their banking systems due to the inability of local financials to make money in such a depressed net interest margin environment – why would they help here?

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Good Economic News Keeps Rolling In

Income Mail by Bryan Perry
Good Tidings for the Average U.S. Household

Growth Mail by Gary Alexander
Will the Coronavirus Infect This Bull Market?

Global Mail by Ivan Martchev
New Lows Coming for Crude Oil?

Sector Spotlight by Jason Bodner
The 5% Correction Was Over in a Flash. What’s Next?

View Full Archive
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About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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