-Old patterns are crumbling as the global economy breaks down
-OPEC economists expect the Great Depression II.
The free-market is picking the winners and losers in the oil market, and the losers are having none of it. Legacy production in the US shale sector had already shown signs of slowing down in late 2019, and the body blows from demand destruction are starting to cause internal damage. Shut-ins, which the US energy secretary said might not return, could be the answer to swelling inventories. For now, state-controlled cuts are not enough to compensate for the loss of demand. To survive this climate, some producers may be forced to do the unthinkable — idle parts of their economic lifeline.
Brent crude oil was up nearly 4% as of 8 a.m. ET to $28.79 per barrel, coming off two consecutive sessions of 6% loss. OPEC economists in the monthly market report for April offered little support, however, stating that the global economy “is forecast to face a severe recession in 2020.”
Texas oil regulators earlier this week in a marathon session heard arguments for and against artificial controls over production in the Permian and other basins. The call came from Pioneer Natural Resources and Parsley Energy, two relative minnows in the Texas shale patch. Marathon Oil and other big players countered by saying it was a tyranny of the minority, arguing the market will take care of itself. There is no such thing, the nay voters said, as too small to fail. Now comes word that the Trump administration is floating the idea of paying drillers to do nothing “for several years, if not indefinitely,” according to Bloomberg News.
“This is an attempt to save more U.S. energy companies from bankruptcy and that is the key,” Phil Flynn with The Price Futures Group in Chicago wrote in his daily newsletter. “The truth is that those that survive this coronavirus shakeout will prosper when demand comes back.”
The survivors may be in Russia or Saudi Arabia, where state levers are more determined. The Middle East and Asian economies, however, will not be spared. Jihad Azour, the IMF director for the Middle East and Central Asia, said oil exporters in the Middle East could see an economic contraction of more than 4.2% this year, while importers decline by 1% after growing by 3.5% in 2019. In Asia, which is supported by strong international trade links and tourism, oil and gas importers decline from 6.2% growth in 2019 to -2.2% in 2020. As with the popular game of Jenga, when the bottom collapses, the whole system falls down. And we’re already seeing some pieces fall to the ground gauging by figures in one of the world’s most transparent economies. More than 20 million Americans are without a job and the New York Fed reported its business activity index dropped a staggering 63 points to -76.5, “both its largest-ever point drop and its lowest level on record.”
The solution to the problem vexing the oil industry is not necessarily a production one, but a demand one. That won’t happen until this thing is over. Or it will be a dangerous return, with the solution worse than the problem. Something different is needed. Henry Kissinger in 1975 said the old solutions would not work as the world entered a new era. “Old international patterns are crumbling; old slogans are uninstructive. Old solutions are unraveling.” At issue now for the oil sector is how long the old solutions will be in vogue.
The GERM Report 