Oil’s Crash: What’s Next?

March 9, 2020

Twitter Thread from Gregory Brew – Brew is a PhD historian of oil, the Middle East, US foreign relations and Iran.

For all my non-oil peeps, an update: 

A few days ago, the big OPEC/Russia meeting ended without a deal to cut production. Now Russia and Saudi, the two biggest exporters, are saying they’re going to maximize production and flood the market.

So why does this matter?

This move is a response to years of frustration: as OPEC/Russia have cut, they’ve lost market share to US shale, which has won a big piece of the market and turned the US into a major exporter for the first time in decades.

Saudi had led the charge to cut production. But this time, Russia wasn’t having it. And now the Saudis have announced big discounts on their crude, particularly the stuff they sell to the US. It’s essentially a declaration of war on US producers. Expect gas prices to plummet

US shale has changed the whole global oil picture. But companies are drowning in debt. The squeeze started late last year, as Wall Street started pressing firms to tighten up and impose some fiscal discipline. Folks expected in 2020 to see the pace of growth in the US patch slow.

But what we might see now is a bloodbath. Gas prices have been floating between $50-60 all year. Most companies can turn a profit at that level. But now prices are in the $40s, with the Saudi surge likely to send them into the $30s. The impact will be massive.

Uncertainty on the market, declining demand, high competition and low profitability is going to hit the domestic US industry hard. It wont kill it entirely, but it will certainly depress investment.

Economically, this could get very bad for Texas and North Dakota, where the oil and gas industry carries a lot of weight. Most companies are hedged, so even sweeping bankruptcies or defaults might not produce economic impacts—a shale bubble might not impact the broader US economy

Low gas prices are usually a plus. But for Trump, this could take the wind out of the whole “energy dominance” thing. The broader economic impact might be worse than some expect.

But what this really shows is the Russian determination to win back some territory on the global oil market—and their willingness to do this, however it might impact the US economy. And Saudi followed suit almost immediately

It’s a price war—what happens in global oil when cooperation breaks down and competition becomes cut-throat. 

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Wall Street Journal:

Markets shuddered Monday in the face of a price war for oil and the economic fallout from the coronavirus outbreak, with frightened investors seeking shelter in the safety of government bonds and propelling yields to unprecedented lows. 

Futures tied to the Dow Jones Industrial Average retreated 4.9%, pointing to a decline of over 1,200 points in the blue-chips gauge after trading opens in New York. The futures contracts earlier hit the 5% maximum allowed in a single session, breaching the limit for the first time since shortly after President Trump’s 2016 election victory. 

Saudi Arabia’s decision over the weekend to instigate a price war as it escalates a clash with Russia sent oil prices down by the most since the Gulf War in January 1991. Crude prices, along with U.S. government bond yields, are typically viewed as key barometers of economic health and confidence, said Gregory Perdon, co-chief investment officer at private bankers Arbuthnot Latham.

“There has always been an assumption that when the oil price collapses the world is going to become a darker place, whether that is driven by the demand side or supply side,” Mr. Perdon said. The latest tensions put the oil market in somewhat uncharted territory with pressure in terms of both supply and demand as the coronavirus epidemic threatens to sap businesses’ appetite for energy.

The plunge in crude added to two weeks of turmoil in equity and credit markets as investors have grown increasingly concerned about economic growth stalling. It also raised fresh concerns about the risks tied to heavily indebted energy companies in the high-yield market, and the fallout for other companies if broader credit markets tighten. 

U.S. government bonds, which have already rallied to unprecedented highs, extended gains. The yield on the 10-year Treasury, which moves inversely to bond prices, dropped to 0.431%. The 30-year yield fell below 1%, reaching 0.866%. 

The Federal Reserve Bank of New York said Monday it will increase the amount of very short-term loans it has been offering to money markets amid the widening market rout. The move underscores the growing concerns about funding constraints and liquidity. 

“The fear today is about a global recession,” said Thomas Hayes, chairman of Great Hill Capital, a hedge fund-management firm based in New York. “If Russia does not come back to the table soon, investors worry the default risk and credit spreads widening will lead to tighter credit and even a recession.”

Public-health authorities are escalating efforts to contain the coronavirus outbreak, leading to a drop in business activity and curtailing global trade. The number of confirmed coronavirus cases has exceeded 110,000, with over 3,800 fatalities globally. At least eight American states including New York have declared states of emergency as infections spread to new parts of the U.S., and Italy quarantined some 17 million people.

12 Responses to “Oil’s Crash: What’s Next?”

  1. Brent Jensen-Schmidt Says:

    Oil price rises, economy tanks. Oil price falls, economy tanks. Amazing really.

    • jimbills Says:

      Contemporary civilization was built on and Is sustained by oil. The real backbone of the economy is energy. Prices too high in oil cause debt defaults and less spending ability for consumers, prices too low cause the same for oil producers.

      It will take far more than most realize to replace this reality.

      The current tank in oil prices is the combined result of overproduction, mostly from fracking, suddenly reduced demand because of the coronavirus, longer term worries about the oil business as a whole, and a very recent price war between Saudi Arabia and Russia – a perfect storm.

      • dumboldguy Says:

        And the “perfect storm” is going to intensify. Too bad it’s going to negatively impact the average world citizen in so many ways—-would be nice if it only hit the rich and the corporations.

  2. andrewfez Says:

    Well I finally bought an index fund now that the market is no longer overvalued; been waiting years for that. Also have been picking up nice undervalued dividend growth companies; the more the market tanks, the higher amounts I buy. Nice times for the long term investor.

    This does hurt the west texas pipeline companies’ ability to deleverage which is what their plan was for 2020-21 and why analysts were giving them high marks and undervalued ratings. Saudi seems to be doing this from time to time.

  3. jimbills Says:

    An article with some good points today:

    Why the coronavirus outbreak is terrible news for climate change
    https://www.technologyreview.com/s/615338/coronavirus-emissions-climate-change/

    • dumboldguy Says:

      He makes many good points. My biggest takeaway from the article is that we are kidding ourselves with all the navel-gazing so early in the pandemic—-Murphy’s law is still around, and it hasn’t taken full effect yet. Who knows?, maybe we’ll get lucky this time.

      • jimbills Says:

        Rigorous lockdowns are the only thing that seem to have any effect right now. They are also unpopular, and as a result, it’s the last thing a Trump administration is likely to do. I’m not sure if luck has much to do with this.

        • dumboldguy Says:

          Luck has a lot to do with everything. If it weren’t for being lucky enough to have a rich father, Trump wouldn’t be president and we likely wouldn’t be suffering as much.

          And I wouldn’t be alive—I’ve had more than a handful of close calls. Don’t sell luck short (although I DO understand that “luck” is a concept that you personally find hard to quantify and analyze).

          • jimbills Says:

            I don’t discount luck – just that we’ve passed the luck stage of this virus. It’s out now. We’d have to get lucky in every one of the many thousands of transmission routes it currently has. That’s so much luck it’d be like winning the lottery a hundred times in a row.

            Action is the only thing that can slow it. Slowing it ‘could’ give time for a vaccine and potentially less transmission with the summer heat. Harsher actions have more effect than lesser ones (like putting more hand disinfectant stations on a cruise ship), but they are also unpopular, especially with the the poor (who would suffer from less income from not working) and wealthy (who would ‘suffer’ from lower profits). That’s a recipe for significantly delayed hard action from a narcissistic President.

            So, it will spread, and we’ll get lockdowns eventually, anyway. If that’s ‘navel gazing’, then fine.

          • dumboldguy Says:

            Of course we’ve passed the luck stage with CV, at least in the broad sense as you’ve outlined. Luck may still be a factor for individuals or small groups—-that is something you can’t dispute.

            There is also the factor of guardian angels to consider. I can accept that there may be a creator, but don’t think he gives a rat’s ass for any of man’s religions or considers man as anything more than another one of his creations like a mushroom or a duck. That still doesn’t mean that some of my close calls didn’t have some “hidden hand” behind them that saved me. Like the time I was nearly shot with an empty rifle.

            And “navel gazing” is prattling on and on and analyzing a situation that anyone with a brain knows is bad and is going to get much worse. Why waste the time?

            PS Just got back from the local WalMart—the shelves are half-bare—-it must have been swarming with people over the weekend.

          • Gingerbaker Says:

            F**k luck.

            I’m quite happy with the liquid grace of a large cat. Don’t deny you are jealous.

          • dumboldguy Says:

            Yeah, I’m jealous—I’d bet you have the “liquid grace” of a cross between the Pink Panther and Garfield. No thanks.


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