From the barrel: Crude oil and Covid-19 virus, two black swans of the market
In a desperate attempt to comprehend the nature of the calamity on the equity markets worldwide, someone shouted "price war". And so in black and white pose, the crisis got stuck in mid-frame, raising questions about who was at war, how and what in all probability would be the consequence to the unsuspecting consumer. So began our efforts to rummage through the embers in search of the meaning of the moment.
In an era where fact is contested by something more powerful, armed as it is with Twitter arsenal and an inscrutable alternative universe, Covid-19 prescribed a woeful defining moment.
A disruptive intervention by any measure, it entered a room peopled with markets, fear, half-truths and an American presidential election campaign season. Tossing things about and finding nothing of consequence, it strolled aimlessly toward 17 Helferstorferstrae for no reason other than the fact that there were too many important people talking about Covid-19, oil production quotas, prices and organisational unity and discipline.
In these hallowed halls of Vienna, no matter what was on the agenda, the two elephants which were not, sat agitated, waiting for calamity to announce. The first was the role of Saudi Arabia as a swing producer within an organisation fast losing global relevance.
The second was the global subsidy which all the oil producing nations must pay to the US shale oil industry. To address these non-agenda elephants, there were three relationship dynamics, more pyramidal than triangular which were expected to contrive the panacea. Russia sat at the bottom of the triangle seething with rage at the latest US sanctions, representing the Allied producers. Opec sat at the opposite end, truly hoping to carry the voice of the rest of its brethren. At the top of the pyramid sat the permanently absent shale, indignantly represented by the Saudis. The topic was about production cuts to sustain the pyramid scheme. For many years the Opec brotherhood has been responsible for the majority of oil production and therefore arrogated to themselves the role of price arbiter. That role was unequally distributed to its constituent members through the facility of production cuts, or simply quotas.
The quota system is not dissimilar to the UN Security Council veto power, which inevitably is awarded to the Saudis. Awhile, the volumes of global demand and the concomitant growth of independent producers gradually changed the dynamic.
The majority of the independents formed themselves into what is loosely termed the "Allied". Like Opec, at the apotheosis of their coalition, sits Russia, the largest producer. Rounding up the triangulation is theworld'ss largest producer as at March 5. This is the shale producer dominated US of A. The door swung violently open, and in a halo-like imperceptibility, entered Covid-19, causing untold pandemonium which pidgin aptly captured as "everything don't scatter"!
The issue was simple, and by deduction, so was the solution. Oil prices were falling precipitously low and something had to be done urgently. Russia was not convinced that production cuts were necessary especially considering that the prices were artificially high anyway.
The Saudis as the voice of Trump, or of shale, sought to bolster prices to a level which would keep shale sustainable. If Russia and the Allied of the Willing did not meet this objective, Saudi Arabia would not either. Rather, they would first abandon shale or Trump if you will, and Opec second and damn the consequences. The markets tumbled and the White House went uncharacteristically silent.
Trump had to take an an un-strategic gamble. First, he insisted on his surrogates to propose production cuts to shore up shale sustainably, even if it meant wrecking the Opec coherence beyond redemption. Second, and most importantly, he insisted that Saudi Arabia should prevail over the Allied resolve. In this much anticipated Putin-MBS showdown, however, Putin predictably won.
Saudi Arabia cannot sustain the current production levels and falling price levels long enough to force the capitulation of the Siberian Bear. With a rising budget deficit and a freshly minted exposure to the stock market after Saudi Aramco’s listing, they are pitted against a debt-free Russia. BNP Paribas’ Harry Tchilinguirian believes that Russia can survive a five-year stretch of a $25 (R405) crude oil barrel price, which Saudi Arabia cannot.
Now that Russia has exposed the myth of the Saudi invincibility, shale, or Trump, whoever gets there first, needs to run to Powell and plead for another round of quantitative easing to avoid junk contagion in the liquidity markets, especially because so much of the shale assets are listed below BBB rating, accounting to a whopping $87billion debt as they do.
The timing of the crisis may hurt Trump’s re-election mantra of a strong, vibrant and sustainable economy. If the union of Opec and the Allied is doomed, it is possible that a new regime of oil trading will replace the petrodollar, a very unique facet of the US dollar’s hegemony in the global economy. Such recklessness for Trump after imposing sanctions against Rosneft, is fatal.
The crisis may eventually humble the impetuosity of the Crown Prince, expose the instability of the "stable genius" and permanently fracture the unity of Opec, but there is no doubt that the union of the producing brethren and the Allied of the Willing is forever damaged.
As we ponder the implications of these events, posterity would agree that the black swan of all swans is a president of the US with barrel loads of impetuosity. Or as they are inclined to phrase it in my village, the Donald is the ultimate black swan.
Ambassador Bheki Gila is a barrister-at-law.