Oil and geopolitics: what will resist in the new (de) globalized order? Raffaele Perfetto's analysis
Opec + was believed to be dead. Yet, pending the next (virtual) meeting on June 10, producers seem to have regained confidence. At around $ 35 a barrel, the reference prices for Brent oil have almost doubled from below the $ 20 levels on April 20. The price responded to the combination of cuts from Opec + and other manufacturers. It also welcomed further substantial cuts, announced by Saudi Arabia, which are joined by timid signs of recovery. But uncertainty continues to persist: will there be a recovery, will it be a false alarm or will we go on hiccups? Fears of a second wave remain which could lead to a more severe recession.
But let's go back to Opec +. On Friday, March 6 in Vienna, the scene looked like that of a spaghetti western. In the days before the meeting, the statements between the Russians and the Saudis reminded us of the close close-ups on the eyes of the gunslingers in the films of Sergio Leone before brutal shootings. Opec led by Saudi Arabia and Russia did not find the square. The Arabs were demanding large production cuts while Russia was in a sense stalling.
In March, the end of this alliance between Russians and Saudis would have had effects not only on price stability, in doubt the geopolitical balance of recent years. The lack of an agreement had thrown everyone into uncertainty at a time of great instability. Also because to understand the depth of this alliance we have to rewind the tape and go back, look at what has happened in the last 4 years without neglecting the details.
ONCE THERE WAS AN ORDER
Just as central banks regulate money in circulation through rates, a sort of central oil bank was similarly in place. It aimed to reduce volatility by ensuring the right stability for investments and consumers. The guarantors of this stability were three main players: Saudi Arabia and Russia on one side and the USA (shale producers) on the other. In reality for shale producers it would perhaps be correct to speak of the role "played" especially by the Federal Reserve. As you know, the shale boom occurred mainly thanks to debt and low rates after the 2008 crisis ( I talked about it here on Start Magazine ). Debt covered small oil companies as the real engine of the boom when cash flows were not enough.
HERE THE MECHANISM WORKED
- November 2016, Opec + announces the cut of 1.8 million barrels per day (not since 2008). In December, the Federal Reserve followed by raising rates from 0.5 to 0.75%. In March 2017 it went from 0.75 to 1%;
- May 2017, Opec + decides to extend the cuts until 2018. In June, the Fed raises rates to 1.25%;
- November 2017, Opec + decides to extend the cuts until June 2018 (then we will talk about it again). Fed rates hike from 1.25 to 1.5% in December
We have reached 2018. This is the year of the tradewar, the Federal Reserve / Opec + synchronism changes. The previous years have served to "set the mechanism".
The price of the barrel of oil runs thanks to the cuts in Opec +. President Trump also comes to the rescue and announces his withdrawal from the Iranian nuclear deal in May 2018. At the time, Iran exported about 2.5 million barrels (six months after a million and a half less). The trade war has begun and American economic growth and perhaps fear of rising inflation pushes the Federal Reserve to raise interest rates in June to 2%. After a few days, OPEC increases production by around 1 million barrels. Meanwhile in October the price of the barrel runs and reaches $ 85, it hasn't happened for four years. In November, however, there are midterm elections in the US and too high a barrel price is not a good deal for the President's electorate. They are people who live in small towns and displaced areas: they mainly travel by car ( I talked about it on Start Magazin and here). President Trump is very active on social media on this issue: the price of gasoline must not increase. The graph below gives an idea.
In early November 2018, the Trump administration allows eight countries to import limited quantities of Iranian oil even after the sanctions. This "delay" in addition to the fears of the trade war and the growth of shale production slows the run of crude oil and reverses the trend seen with the peak of 85 dollars in October.
December 2018, midterm are behind, Opec + can now cut: it takes 1.8 million barrels per day out of the market.
2019: SAUDI AMERICA
At the beginning of 2017, the United States recorded a daily production of oil of almost 9 million barrels. Twelve months later they reach 10 million. In January 2019 they recorded almost 12 million. The increase in production in 2018 is almost double in 2017. On 13 March 2019 Mike Pompeo at CERAweek , one of the most important annual events in the oil world (canceled in 2020 due to the pandemic) beats hard on Russia and China, on the role of the energy in their foreign policy. It is no longer business or economics. We are now clearly in the field of geopolitics.
In a passage, Secretary of State Pompeo underlines his past as an oil man: “I spent a fair amount of time in the oil & gas industry. I ran a small company; it was called Sentry International. We manufactured and sold mud pumps, well equipment, and distributed sucker rods. So I know the industry well. "
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/petrolio-cera-una-volta-unordine/?utm_source=rss&utm_medium=rss&utm_campaign=petrolio-cera-una-volta-unordine on Fri, 29 May 2020 05:00:54 +0000.