The real story is not the US but the global price. If it stays this low, world geopolitics could be rewrittenby Michael Grubb / April 22, 2020 / Leave a comment
Oil—aka Black Gold, the lifeblood of the global economy, or simply The Prize—is in deep trouble. Like something from Alice in Wonderland, the last few weeks have seen supposedly impossible events. The US president intervened with Russia and Saudi Arabia to try and force prices up. Despite the biggest production cutbacks in history, the price of the US benchmark oil went negative earlier this week. That bizarre spectacle reflected the peculiarities of US contracts and storage infrastructure. The real news is the global price; the real question is how low will it go and for how long.
“Normally” sustained over $60/barrel (as widely indexed to Brent crude), after a limpid rally earlier in April, the global price this week has gone down to $20/barrel. If anything like that persists, hundreds of the smaller energy producers will go bankrupt, petro-regimes may fall, and world geopolitics could be rewritten. Oh, and the bottom may have dropped out of your pension funds.
The common assumption is that thanks to Covid-19, the oil markets have caught a nasty bout of flu and will recover to something like normality, as they always have before. They won’t.
If it were “just” Covid-19, oil would recover. But it already faced two other challenges. The first was over-supply. The oil price collapse started just before the Covid-19 crisis broke, with the Saudi-led OPEC unable to agree production cuts with Russia. Prices close to $60 throughout 2019 were bringing in ever-more US shale oil, challenging both OPEC and Russian production. It was encouraging other new producers, including from Africa. According to the textbooks, as the biggest and cheapest supplier, Saudi Arabia could win any price war as it has done before, thus stabilising the market.
However, the Saudi regime depends on high oil prices to balance its books. Russia is much more diversified, and is equally concerned about US shale gas exports undermining its pipeline gas markets—which mostly involve oil-linked prices. Global liquefied gas (LNG) prices had already collapsed—first in the Atlantic basin and then more dramatically in Asia. One of the world’s leading gas research centres, the Oxford Institute of Energy Studies, projects that the LNG glut will last a decade, at prices which can compete with coal for power generation and oil in key petrochemical…