These are the key pivots in the Oil Wars.
US shale producers have added a huge surplus into the global oil market , making the US a net oil exporter. OPEC+ Russia was trying to keep supplies constrained to keep prices up. They tried to bankrupt the US producers in 2014 but failed
Last week there was no agreement on further cuts. This seems to be a decision made to push the over-leveraged US shale producers to bankruptcy by unleashing a supply glut in a falling demand environment. The consequences are complex
A large portion of the US junk bonds market is funding US shale producers . At USD 55 levels they were profitable. At USD 35 levels it will be difficult. The Saudi and Russian aim is to cripple this supply and then raise rates once bankruptcies have removed some of this.
This was tried in 2014 and did not work. In 2020 given the demand pressures, the amount of debt and the size of the US shale production , this oil price war will hurt if prices stay below USD 50 to 60 range
The Russians have built financial reserves over the last 6 years and can withstand the huge fiscal deficit that low oil prices and continued economic sanctions will lead to. They claim they can hold out for multiple years. Not so sure
Saudis will face larger fiscal deficits in selling oil so cheap. The showcase Aramco listing is already trading below the IPO price. The Saudi govt will need to borrow and spend more and keep the growth initiatives going domestically. Funding becomes a question mark
Other OPEC producers will see a knock-on impact of lower prices. Real estate in the Middle East will be the first victim. Recipients of aid from the Middle East as well as the value chains supplying goods to them will suffer
Nonoil producing countries will see their oil import bills lowered dramatically if oil sustains at the USD 35 levels for a few months . Consumers will benefit and central banks will have monetary space to cut rates as deflation gets imported in
But the destruction in aggregate global demand is what is spooking the markets. Given integrated value chains, demand destruction will outweigh the positive impact of lower oil prices globally
Add on Coronavirus uncertainty, a US election year, already weak European, Japanese, Chinese economies and we have a major global risk-off. On its 11th anniversary, the Global Bull market is teetering on the brink of ceding ground to the bears
The usual monetary stimulus is still on the table but seems to have diminishing marginal utility. Fiscal steps will be needed to reinflate and reflate the global economy. Those resources are limited
Add in the geopolitical issues and we have convergent, global, large scale risks. The need is for a fresh concerted, convergent and united action by the G7 and G20 leadership
Statesmanship is rare at present in the anti-globalization, "my country first" environment. The market forces will take time to sort this out and the cost will be painful. "RIP Good Times" as a PE fund wrote in 2008 before the GFC tsunami. We have to move fast, unitedly....
Experience best crude tips on our website and make money like professionals.
You
should Trade Less But Trade Accurately & this is Achieved with our Tip.
