The Wall Street Journal - USA (2020-12-02)

B12| Wednesday, December 2, 2020 THE WALL STREET JOURNAL.

OPEC, Allies Face Lose-Lose Equation

The group of oil producers will encounter risks no matter which route they choose to take on output

OPECmembersandRussia's

estimatedchangeinrealGDPin

2020,changefromayearearlier

Source: International Monetary Fund

–80%–60 –40 –20 0

Libya

Venezuela

Iraq

Kuwait

Congo

UAE

EquatorialGuinea

Algeria

SaudiArabia

Iran

Nigeria

Russia

Angola

Gabon

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

The organization and its Russian-led partners have postponed a meeting until Thursday. A oil field in Russia.

ANDREY RUDAKOV/BLOOMBERG NEWS

The economy is in for a tough

winter. But the manufacturing sec-

tor appears to have the where-

withal to push through it.

The Institute for Supply Man-

agement said Tuesday that its in-

dex of manufacturing activity came

in at 57.5 in November—a bit below

the two-year high of 59.3 it regis-

tered in October, but still a signal

that the sector is swinging higher.

Anything above 50 indicates a rise

in manufacturing activity.

The ISM’s gauge is a diffusion in-

dex, based on how many manufac-

turers say activity is expanding ver-

sus contracting, so it doesn’t directly

measure manufacturing output. A

Federal Reserve index does and it

shows that as of October manufac-

turing production was about 4.6%

below its level in February.

That is somewhat curious con-

sidering that, adjusted for infla-

tion, consumer spending in Octo-

ber was 2.2% shy of its February

mark, according to the Commerce

Department. And consumer spend-

ing on goods was 8.4% higher.

A reason for this disconnect is

probably that manufacturers’ cus-

tomers have been drawing down in-

ventories to keep up with demand.

Indeed, a separate index in Tues-

day’s ISM report showed manufac-

turers believe their customers’ in-

ventory levels are “too low” to the

most extreme degree in over a de-

cade. So even if final demand didn’t

rise any further, manufacturers

would still need to step up output to

bring inventories back into balance.

That dynamic could help insulate

them from what is looking like a

tough winter. With Covid-19 cases

rising and government support fad-

ing, it looks as if consumer spending

is starting to falter. With vaccines

unlikely to become widely available

until the spring at the earliest, some

economists are forecasting gross

domestic product to register a slight

contraction in the first quarter.

Furthermore, while manufactur-

ers’ customers could be in for a

difficult spell in the first quarter,

they will have to consider the jump

in demand they are likely to experi-

ence after vaccines become widely

available. Even if business slows,

they might want to start stocking

shelves a little more now. Winter

will be a dark season for the econ-

omy, but manufacturing could be a

bright spot. —Justin Lahart

The arrival of a vaccine is a
blessing for oil producers. Hopes
for a vaccine, however, are causing
a massive headache for members
of the global oil cartel and its Rus-
sian-led partners. Some of its
members—financially battered and
facing internal turmoil—are reach-
ing the end of their ropes.
The Organization of the Petro-
leum Exporting Countries met
Monday and was scheduled to
meet with Russian-led producers
Tuesday to decide whether to go
along with their next scheduled
production increase of two million
barrels a day, delay it for a few
months or opt for a smaller boost.
The market had priced in a delay.
In April, so-called OPEC+ agreed
to cut production collectively by
9.7 million barrels a day, with grad-
ual production increases every six
months. Tuesday’s meeting was
postponed until Thursday as the
countries try to iron out their dif-
ferences. Talks have become more
complicated as Brent crude prices
approached $50 a barrel on vaccine
optimism. While that isn’t high
enough for OPEC members to avoid
fiscal deficits, it makes some feel
antsy about forgoing revenue. After
briefly breaking above $49 a barrel
last week, Brent crude slipped be-
low $48 after the group failed to
reach consensus on Monday.
Take Iraq, OPEC’s second-largest
producer, which depended on oil for
92% of its revenue in 2019, accord-
ing to the World Bank. The country’s
gross domestic product is expected
to shrink this year to an extent not
seen since 2003, the year of the U.S.
invasion. As of October, the govern-
ment’s oil export revenue wasn’t

enough to cover public salaries, ben-

efits and other essential expenses,

according to S&P Global Platts. All of

that comes with the backdrop of an-

tigovernment protests that have

erupted since late 2019.

Iraq indicated last week that the

country is losing patience with the

OPEC+ imposed production cuts. It

isn’t alone. The country is one of

seven for which RBC Capital Mar-

kets has raised its gauge of geopo-

litical risk. The restless group in-

cludes Nigeria, which slipped into

recession and faces protests at

home as well, and even the rela-

tively well-off United Arab Emirates.

Despite differences, OPEC+ is

likely to work hard to come up

with a unified message, according

to Helima Croft, global head of

commodity strategy at RBC, noting

similar tensions haven’t been un-

common ahead of these meetings.

Whatever decision they arrive at

carries its own risks. If they go

against expectations, opting not to

moderate the cuts or choosing to

slowly increase production, it risks

undoing the price recovery the

group helped engineer since the

spring. The fact that OPEC+ has

been predictable so far this year

has heightened traders’ expecta-

The latest uncertainty comes at a

time of precarious demand recovery

as coronavirus cases climb globally.

Complicating matters, supply is

quickly recovering in war-torn

Libya, an OPEC member exempt

from current cuts, and drilling ac-

tivity is slowly resuming in the U.S.,

where local benchmark crude prices

are about $4 away from a price that

makes new drilling profitable for

the average producer.

Herding exporters into agree-

ment was much easier when

Covid-19 plunged all of them into

crisis. Discipline is fading now that

arecoveryisinsight.—Jinjoo Lee

tions. Dashing them, even at the

margin, could cause market turmoil.

But if the group extends its cuts

as the market expects, or even

deepens them, the group risks com-

pliance issues from members that

are having trouble sticking to pro-

duction quotas. Iraq and Nigeria re-

peatedly exceeded agreed levels. If

OPEC+ members make 70% of their

agreed cuts in 2021 and 2022, then

average oil prices could fall as much

as $7 a barrel next year compared

with full compliance, noted Bassam

Fattouh and Andreas Economou of

the Oxford Institute for Energy

Studies in a recent post.

Production

Spurt

Has Room

To R u n

Restaurants Have Less Under the Tree

Weak gift-card sales could be an obstacle to full recovery for chains like Cheesecake Factory

Casual dining stocks have almost
fully recovered from the pandemic.
One hurdle they still have to face: an
uncertain holiday season.
A resurgence in coronavirus
cases is hitting the industry cur-
rently. Seated diners at U.S. res-
taurants were down 48% from a
year ago as of Sunday, according
to data from OpenTable. Many in-
dependent restaurants closed as fi-
nancial pressures intensify.
Publicly traded sit-down restau-
rant chains are hardly worse for
wear: shares ofDarden Restau-
rants, which owns Olive Garden and
other brands, are down about 9%
since a high in February, while
Cheesecake Factorystock is down
8% over that same period.Brinker
International, which owns Chili’s, is
up about 22% so far in 2020.
But the arrival of the holiday sea-
son means a big question for inves-
tors: Will shoppers buy gift cards
for the chains at the same rate?
More than half of annual gift-card
sales for the industry occur around
the holidays, according to Wells
Fargo Securities analyst Jon Tower.
Under U.S. accounting rules, restau-

rants book revenue from the gift

card when it is redeemed.

In 2019, according to Mr. Tower,

redemptions accounted for 14% of

first-quarter restaurant sales at

Outback Steakhouse parent

Bloomin’ Brands, and 9% at

Cheesecake Factory.

Hanging onto those sales could

be the difference between meeting

or missing sales and profit expec-

tations. This year, with reduced

foot traffic in malls, pharmacies

and other stores that sell cards,

there is a high risk that gift-card

sales will disappoint. What’s more,

with virus cases up, an evening

out at the local restaurant may not

make for an appealing gift.

At the same time, digital order-

ing options have made buying gift

cardsontheweborviaanapp

much easier. Running a promotion

is also easier: Chili’s, for example,

is offering diners a $10 gift card

free with a $50 gift card purchase.

Many rivals have similar deals.

What is more, revenue from a

cardcanberecognizedifarestau-

rant concludes it is unlikely to

ever be redeemed. Management

has wide latitude to set assump-

tions on expected redemptions, es-

pecially since business conditions

and consumer behavior have

clearly changed this year. That

should give some wiggle room if

sales or redemptions are lighter

than expected.

With safe and effective Covid-19

vaccines on the way, the industry

outlook is bright. Pent-up demand

for dining out should be very

strong, and the bleak outlook for in-

dependent restaurants means less

competition for diners and opportu-

nities to expand on favorable terms.

The coming year should be a very

good one for the industry, as long

as the holiday gift-giving season is

close to normal. —Charley Grant

OVERHEARD

As China’s heft grows, other

nations have become concerned

over its efforts to set the techni-

cal standards for emerging tech-

nologies like 5G.

Also, pickled vegetables.

In November, global industry

standards body ISO published a

document certifying the unique

properties of “pao cai,” a type of

Chinese fermented vegetable

similar to the Korean dish kim-

chi. After Chinese state media

labeled the achievement a China-

led international standard for

kimchi, South Korea’s agriculture

ministry said Sunday that inter-

national standards for kimchi

were agreed upon by the United

Nations in 2001 and that it was

inappropriate to lump in kimchi

with pao cai.

China and South Korea have

close tried ties, but relations are

often contentious. When it

comes to symbols of national

pride, Chinese and South Kore-

ans seem prone to get into a

pickle.

Bank Mergers Are No Panacea

Bankers love to think about

mergers, but they aren’t a simple

solution to the problems of Eu-

rope’s lenders, even within the

same country.

UniCreditshares plunged Tues-

day after Chief Executive Jean

Pierre Mustier said he was step-

ping down over a disagreement

about the strategic direction of It-

aly’s second-largest bank. A widely

respected figure, Mr. Mustier had

pushed back against board pres-

sure to do deals, favoring capital

returns to shareholders.

Last week, talks between Span-

ish lenders Banco Bilbao Vizcaya

Argentaria and Banco de Sabadell

collapsed due to disagreements

over pricing, also highlighting the

shaky case for deals.

Bank mergers have long been

seen as a way for European lend-

ers to boost profitability in the

face of persistent ultralow interest

rates, sluggish growth and fierce

competition from larger U.S. rivals.

A patchwork of European and na-

tional regulations all but block

cross-border mergers, but domestic

tie-ups have been possible. This

summer, Intesa Sanpaolo bought

UBI Banca to create Italy’s largest

bank. Plus, CaixaBank agreed in Sep-

tember to merge with Bankia to cre-

ate Spain’s largest domestic lender.

The logic even for domestic Euro-

pean banking mergers isn’t straight-

forward. Deals offer potential for

cost-cutting and market-share gains,

particularly in overbanked Germany,

Italy and Spain. However, rationaliz-

ing branch networks can be very ex-

pensive and integrating a web of

legacy systems is a challenge, par-

ticularly as customers increasingly

expect to bank online.

Valuation is a barrier to getting

deals over the line. They are gen-

erally all-share exchanges, and the

poor stock-market performance of

banks this year has muddied the

relative weight of different players.

There is also a lot of uncertainty

about what loan books will be

worth in a post-pandemic world.

There had been speculation that

UniCredit might do a deal with

Germany’s Commerzbank, France’s

Société Générale or troubled do-

mestic lender Banca Monte dei Pas-

chi di Siena. However, during his

4½ years in charge, Mr. Mustier fo-

cused on making the bank leaner.

Mergers clear a half-plausible

path to profit growth. That is

enough for some European banks,

but the latest ructions serve as a

warning that the strategy is fraught

with difficulties. Success is far from

guaranteed, even for those deals

that go ahead. —Rochelle Toplensky

Share-priceperformance

Source: FactSet

–80

–60

–40

–20

0

20%

Jan.2020

UniCredit

IntesaSanpaolo

BancoBilbaoVizcayaArgentaria

CaixaBank Bankia

BancodeSabadell

More than half of annual gift-card sales for chains occur around the holidays.

JEFFREY GREENBERG/EDUCATION IMAGES/UIG/GETTY IMAGES