Things Are Exactly How They Seem

Risk level: RED

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)


-WTI in a free fall, but it doesn’t matter

-No production deal can save us now. Except when it does.

If you’re reading this, odds are you work in the energy sector, though not on the front lines. That means your perception of the energy sector is distorted by what Martin Heidegger called your referential totality. Your perception of your world in your surroundings is unique to you, though there are common themes. One of the common themes in this economy is that storage levels are filling up, and fast. There is nearly a two-week window left for OPEC and other producers to churn out oil at will before an arrangement to trim some 10 million barrels per day from the market kicks in. With US crude trading in the low teens, however, the perception in the market is one of demand, not supply.

Brent crude oil was down 10% in trading last week amid dire warnings about the sweeping damage in the economy caused by demand disintegration. To say that West Texas Intermediate, the US benchmark, is getting hammered would be an understatement. Forward-month contracts do show some improvement, though it could be December before prices return to break-evens for many producers.

A few days before OPEC+ members held an extraordinary meeting to discuss the future in a market devastated by the impact of coronavirus quarantines, US President Donald Trump spilled the beans on a deal designed to take some 10 million bpd off a market already way over-supplied. That deal was lauded as one of the greatest breakthroughs in the market, bringing dozens of state-centric and free-market players together in coordinated fashion to stabilize the market. “The Art of the Oil Deal,” lauded The Wall Street Journal (with caveats). Trump, the column stated, may have oversold the outcome of the deal, but that doesn’t matter and that was last week. Brent managed only a modest bounce after the Easter Sunday deal, though the market may have already factored the arrangement in when oil jumped some 43% over the first three days of the month. The perception has changed. Those gains are gone, WTI is in a free fall and some observers are now describing the deal as a market miss.

I pondered the idea of how perception is a force of distortion in the pages of the Carnegie Council for Ethics in International Affairs some two years ago by examining the constructivist logic in global issues. From the perspective of constructivism, changes in psychology mean changes in the world. Peace and harmony must be, according to the theory, in the mind of the beholder. If the global political system is in balance, it seems to be equitable. If it’s equitable, then most actors are succeeding. If most actors are succeeding, there’s a relative belief in harmony. And if the system is harmonious, leaders and their constituents want to keep it that way. If that perception falters, the opposite then must hold. If we’ve learned anything from the current political era it’s that perception means everything. “Trump says … “ can steer the market up or down, even when what he says isn’t true.

The mood in pre-market trading on Monday was sour, with WTI charting unprecedented lows. John Kemp, the Reuters oil guru, observed that WTI may be under technical pressure due to the expiration of the May contract. “The numbers on the screen today,” he wrote, do not matter, aren’t very relevant and aren’t very informative. That may be true, except when it isn’t. There’s a parable from Don DeLillo’s book, White Noise, of “the most photographed barn in America.” Here, two travelers debate whether they can see the barn, or only the perception of the barn that is the “most photographed” one in America.

“We’re not here to capture an image, we’re here to maintain one,” said one of them. “Every photograph reinforces the aura.”

The economic aura is distorted. Neil Postman, a groundbreaker in media observations, wrote that our world is defined by our perceptions of previous experiences and all we see are metaphors. Words stand for things and are not the things themselves. For Heidegger, that metaphor creates our reality and in international relations, it distinguishes for the United States a British nuclear weapon from a North Korean one. The aura in the market is one of pessimism and disappearing demand. No production deal can address that. Except when it does.

The spread between Brent and WTI could start to shrink this week as contracts align. And there may be some demand returning as parts of the European economy come back to life. But there’s a long way to go to normal. Monday was a bit of an insult-to-injury day, with the Chicago Fed’s national activity index turning negative. Economic sentiment barometers for the euro area on Tuesday are not expected to offer any support. Nor is the consumer confidence reading for Europe on Wednesday. It should go without saying too that US inventory data will be bruising. S&P gives a reading on Britain’s sovereign debt on Thursday, and we also have PMI readings from some segments of the European Union. With the US curve not yet flattening, labor and manufacturing data this week will be disappointing. The week ends with an economic forecast for the EU, rig counts and April sentiment from the University of Michigan. As with last week, the alerts are showing Red for the foreseeable future, with Brent expected to move by at least +/-4% on the week.

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