Oil to Ten Bucks a Barrel?
The all-American president is having his loyalties stretched. On the one hand, he loves cheap gas at the pump. On the other hand, those prices present an existential threat to US shale survival. To save those stocks and to stop oil literally spilling over available storage, he got no choice but to cut a deal to cut!
Russia and Saudi Arabia, the big drillers, need persuading to rein in their oil production. They hold all the cards, however, and they’re not used to doing the West favors. Their goal from the start has been to kick American shale while it’s down and tip it over the edge of insolvency. If they put a stop to their campaigns now, what’s it all been for?
President Trump might need to give up everything over the negotiating table to save shale, so the next best thing could be to save the world from a storage crisis. Storage owners must give oversupplied crude a home. They can either be forced the way of government orders, or it can be made worth their while!
If a trader sees companies paying big premiums to lock in oil prices for a coronavirus rebound next year, they’ll buy barrels today to resell at the premiums down the line. Their profits will be shared with storage tankers, convincing them to get off lucrative trade routes, anchor down and hold that oil for the year. The kicker is that for a big enough premium, Brent will need to trade lower, much lower.
Some analysts say ten bucks, others say zero, a few say negative. That means more production, Trump getting the cheap gas he so loves, and rallying behind the Ruskies to drill. It sounds crazy. More production means storage overflowing?
President Trump would have to hope the economy restarts quickly and oil demand returns in a big way to stop that happening in this strategy. It’s a massive risk. He may be forced to take matters into his own hands and issue that government order, assuming he gives up on shale and doesn’t use trade barriers and sanctions to get an OPEC++ deal.
This crisis could define industrial stocks for years to come. No sooner than prices could drop to $10 could they shoot up over $100, as pent up demand in the post corona catch-up creates loud oil calls that shut down producers can’t answer. Get ready for the US crude inventory readings tomorrow. They’re going to be colossal!
