The GERM Report

-Want the government to step in? Be careful what you wish for.

-Bob McNally believes April will be “a particularly brutal month”.

It seems as if most major oil producers will at the very least back some sort of rhetoric stating they’re all on the same page. There are few, if any, winners in the current climate, so the mere suggestion of some sort of truce in a depression-era war over market share sent the price of Brent crude oil up more than 40% at one point in intra-day trading on Thursday. What that truce looks like, however, is anyone’s guess as the bull rush brought in players from all sides of the oil spectrum. Capitalism, say some of the economic thinkers in the radical camp, works until someone cheats, and someone always cheats. That was certainly the case under the OPEC+ constraint agreement with players such as Iraq. The new era of viral contraction requires a new way of thinking. With nationalism a trending phenomenon, what the new world order in the oil market looks like may be concerning for some and celebrated by others. Regardless, there will be cheaters. The question is, then, who gains the most by cheating. That could offer some hints as to what happens next.

Brent crude oil was up 11.4% at 8 a.m. ET to $33.34 per barrel. The global benchmark is up a staggering 34% so far this week and the hopeful expectations that the worst is behind us suggests a sub-$30 market was tested and failed.

If you’re reading this, you know what happened yesterday in the oil market. Trump’s suggestion that Riyadh was ready to talk with Russia even after the Kremlin balked on further constraints was far louder than the questions surrounding his claims. To hit his benchmark of 10 million barrels (per day?) would mean the two market rivals alone would have to cut output by as much as 50% and it’s highly unlikely that would happen. Riyadh is holding to its position that it will back down if everyone else backs down too, but we’ve seen enough Westerns to know how that gunfight ends. Perhaps the bankruptcy of North Dakota producer Whiting Petroleum was that casualty. Elsewhere, the Kremlin said there were no such agreements in place to stem production.

Global storage capacity is filling up and producers may be forced to cut back. Writing as a non-resident fellow a Colombia University’s Center on Global Energy Policy, Bob McNally believes April will be “a particularly brutal month” as producers tilt the market to a 26 million bpd surplus and oil will start spilling over tank tops “in the coming months if not weeks.” Producers vying for a market share will be forced to restrain themselves simply because there will be no place for those extra million or so barrels. Some players haven’t got that message yet. Industry sources told S&P Global Platts that the UAE’s Abu Dhabi National Oil Co. was churning out some 4 million bpd, up from its record of 3.5 million bpd.

But Trump needs a win, both for his ego and for his re-election odds. Some 6 million Americans lost their jobs last week. On Friday, the US Bureau of Labor Statistics reported the US mining and manufacturing segments shed a combined 24,000 jobs in March, and much of that was before state-mandated quarantines. In quarterly earnings reports, many of the majors said they would at the very least impose a hiring freeze.

Cue Ryan Sitton, a Republican member of the Texas state energy regulator, and a handful of market supporters asking for some form of government intervention. As John Meynard Keynes observed in the shadow of the Great Depression that old ways of thinking might not work anymore, so too did Sitton call for a new way of thinking. That new way of thinking may involve the nationalization of the US oil sector. Or at least an effort to nationalize the US oil sector. The American Petroleum Institute, however, stated in an emailed letter that the free market works best. Demand will return eventually, so don’t panic.

“American families have benefited mightily from American energy dominance in the form of plentiful oil supply and affordability,” the letter read. “Taking steps to restrict that supply could jeopardize these gains.”

But sifting through the tea leaves suggests the API might not get what it wants, Sitton wins and Trump says “thank you, Mr. President” after crude oil prices jump on news of direct government action. That gives at least one domestic segment of the US economy a shot in the arm. Already, reporting in the Financial Times suggests major US shale players want to block foreign oil from the domestic market, notably Saudi Arabia’s Motiva refinery in Port Arthur, Texas. McNally in his piece notes this isn’t the first time for direct control over the Texas oil patch. And that lesson suggests it will happen again.

“Even the most free-market countries cannot tolerate boom and bust price cycles for a commodity that is tantamount to economic lifeblood,” he wrote.

But this is not the 1930s. According to the EIA, foreign companies started in 2008 to lemming their way into US shale joint ventures to the tune of $26 billion in investments. How those foreign investors will welcome government intervention is unclear. What is clear, however, is the concern raised by several producers to contract terms in countries where government control is customary. And what about cheaters? Rules are indeed made to be broken and with the Trump administration accused of handing out political favors to private-sector favorites, it’s likely that there will be big winners and big losers in the new market landscape. Jean Jacque-Rousseau noted that a surplus awakens greed; the more one gets, the more one desires. To the victors go the spoils, but be careful what you wish for.