The Mother-Of-All Oil Wars
Did Russia just crash the stock market? Or was it Saudi King Salman? The Federal Reserve? Perhaps Wall Street all along? Pandemonium has erupted in financial markets following the breakdown of the world’s oil cartel. Monday blues!
As a legal cartel, the Organisation of Petroleum Exporting Countries (OPEC) is supposed to be united. It’s supposed to take heed of the world’s demand for oil, negotiate drilling, prevent oversupply and undersupply, and keep prices per barrel stable. But that all went out the window on Friday.
Russia vetoed curbs to production, despite the coronavirus panic. It’s going to hike production instead. It’s going to flood the market with oil, and it’s going to plunge oil prices as a result.
This is not about market stability. It’s a thrust for market share; a torpedo sent the way of competing shale companies belonging to other kleptocracies in the OPEC group.
To protect its trillion-dollar stock market freshman, Saudi Aramco, kingpin producer Saudi Arabia will also open up the taps. That makes it an all-out price war between the heavyweights!
It’s worth remembering that airlines are drastically cutting capacity right now and not fueling as many planes amid COVID-19. Manufacturers are winding down their production lines as consumers stay at home, and freight transporters have fewer goods to ship. The oversupply is about to be mind-boggling!
West Texas Intermediate and Brent Crude prices crashed 31% at the market open, the most since the Gulf war. The Invstr community massively short-sold oil overnight by a margin of 20%, Japanese stocks tanked 7%, European stocks, 6%, the entire yield curve for US Treasury bonds went sub-1%, and futures on the S&P 500 dived so far that trading was stopped. Don’t panic. Keep notes of others’ behaviour and use this as an opportunity to learn about stock market animal spirits!
Cheaper gas at the pump could prove a massive setback to the clean energy movement, including Tesla’s electric vehicle push. Exxon and Chevron are under siege, ‘upstream’ shale players in the business of selling the oil they drill at market prices. Those stocks will fall hard, whereas refiners like Tesoro and Valero should do better as net buyers of the sticky stuff.
If you’re feeling lost, just think of this price war like a competition for holding breathe underwater. It can’t go on forever, or everyone will drown. It’s simply not commercially viable to keep oil prices this low. After a few players run out of air, the others will decide they’re the winners and that they can go on no longer. Production will be reeled in, and oil prices will self-correct. The problem is the interim damage. Investors aren’t just at risk of drowning here. There’s a pathogen on the loose!