-What would Keynes do?
-Trump intervention, Chinese buying spree, gives markets a push.
Trump giveth and Trump taketh away. A presidential warning on the possible US death toll from COVID-19 spooked markets early Wednesday, though his let’s-make-a-deal comments on oil production sparked a major rally some 24 hours later. With large swathes of the US economic machine shutting down, however, supply chains are clogging up to the point that the International Energy Agency added bottlenecks to its triple-whammy market projection. For US shale producers, the good ol’ days are over and it’s time to panic. Texas oil producers are calling for an OPEC-like structure to stem the bleeding, though that idea to some will only make matters worse. Trump meets later this week with major producers to address the issue. Gauging by the market reaction today, nationalism is a growing trend.
Brent crude oil was up 10.7% as of 8 a.m. ET to hit $27.39 per barrel, following an 8.8% gain in the previous session. The rally followed calls by US President Trump and Russian President Putin for some form of coordination to address the growing market malaise.
US policymakers are playing both sides, pressuring Saudi Arabia to play ball while cajoling the Kremlin for a cease-fire in the oil price war. Speaking to reporters in what’s become a regular press conference on the impact of the coronavirus, Trump said he was expecting a truce.
“Worldwide, the oil industry has been ravaged,” he said. “It’s very bad for Russia, it’s very bad for Saudi Arabia. I mean, it’s very bad for both. I think they’re going to make a deal.”
Putin, who had been touting the durability of the Russian economy under sanction and market pressures, said the pain was all-encompassing. Because all players were feeling the pain, all players should work together to find a solution.
“… we are to work out such solutions that will soften the situation on the market at large together with major producers and consumers,” he said.
That comes as some segments of the Texas oil patch call for artificial controls to prop up an industry hammered by demand disintegration. Ryan Sitton, a right-leaning commissioner for the Texas state energy regulator with political ambitions, called for a 10% reduction in output, mirroring Saudi Arabia’s mantra of “we’ll cut if you cut first” control.
“With other governments manipulating oil markets, it’s fair to ask: Why shouldn’t our government step in to try to reinstate a more market-based approach?,” he posited last week.
The idea that if the private sector, or even individuals, are unable to do something, then it’s up to the federal government, is a sort of Keynesian approach to market control. Sitton’s plea for a new way of thinking even parallels the unraveling of the “bondage of old ideas” advocated by Keynes. Others, however, are not so convinced. The answer lies more in the health sector than in the energy sector. The thinking there is that once quarantine restrictions are lifted, the free market will likely take care of itself. And we’re already seeing that today to some degree. China, which may have passed the coronavirus apex, is reportedly in a crude oil buying spree, helping to drive today’s rally even further.
Don’t hold your breath for a marathon run for the bulls, however. US jobless claims for the week ending March 27 came in at a staggering 6.6 million, double the filings from the previous week. Elsewhere, the International Energy Agency said there is yet another issue straining the markets.
“As demand plummets, the entire supply chain of oil refining, freight, and storage is starting to seize up, making it increasingly difficult to push new supply into the system,” it stated. “Prices available to producers have fallen to single digits in Western Canada and there have even been incidences of negative pricing for some grades in parts of North America. For some producers, there could soon be no place for their oil to go.”
That issue is prevalent with or without a sound market strategy. That may be a factor for Trump’s market advisors as they ready for meetings with leaders from the likes of Continental Resources (see: Harold Hamm as an early name for the Trump cabinet) and Exxon Mobil (see: Rex Tillerson). Considering Trump is up for re-election in a time of profound economic crisis, he may be compelled to take a save-the-day strategy and embrace calls for a sort of nationalization of the US energy sector.
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