-The times they are a’changin’.
-US may need an all-options-approach to save shale.
Sweeping demand destruction that followed a price war between Russia and Saudi Arabia was the systemic shock that changes the things in ways that usually only general wars can. If economic and manufacturing performance are tantamount to national strength, the international dynamics will be profoundly changed once the pandemic is over. Already, some commentaries have declared the end of American energy dominance, though some players are calling for dramatic changes in the way the game is changed. Collateral damage victims, meanwhile, are saying the trading systems are not only broken, but perhaps rife with cheaters. Beneath the din and producers and importers alike are scrambling for one of the scarcest commodities around – storage.
The price for Brent crude oil was up some 2% as of 8 a.m. to trade at $19.74 per barrel. Markets took a beating in the previous session, though much of that was on technical issues related to the expiration of the May contract for WTI, which may be on its last legs as a benchmark.
Robert Gilpin, a scholar of international political economy at Princeton, wrote that great turning points in history followed hegemonic struggles for power such as German ascension in the early 20th century. These hegemonic struggles for power not only resolve the question of which power leads the international system, but how that international system looks.
“The outcomes of these wars affect the economic, social, and ideological structures of individual societies as well as the structure of the larger international system,” he wrote.
While some political leaders whose constituents depend on commodities such as oil and coal may say there’s a declaration of war against those assets from those in the opposition, the global community at large is indeed waging war against an invisible enemy. That war is already changing the dynamics of the international system. A year ago, the biggest players in OPEC were concerned about the rising market share for US crude oil. Ascendant powers behave in a certain way. US President Trump spent much of his first term criticizing OPEC for inflating the price of oil, arguing in 2018 that the US military posture in the Middle East was deserving of economic favors.
“We will remember,” he tweeted. “The OPEC monopoly must get prices down now!”
And down they went, taking parts of the US shale oil sector with them. Crude oil prices in the low $20s do little to support shale exploration. Market factors may be working as expected, with the anticipated recession weeding out the less efficient and cutting barrels from the glut. Now, some of the companies with the biggest risk are calling for systemic change in the way the US market operates. Texas Railroad Commissioner Ryan Sitton has argued in support of calls from Pioneer Natural Resources and Parsley Energy for artificial control over crude oil production. Drastic times call for drastic measures, Sitton said in favor of reviving a 100-year-old law on prorationing.
“Let’s be clear, taking weeks, even days, right now to act is in itself a choice,” he said.
Sitton’s argument rests on OPEC-like control over the US energy sector, something unthinkable when Trump came to power. US Energy Secretary Dan Brouillette told Energy Intelligence, however, that anti-trust rules in the United States mean intervention is “clearly illegal.” Nevertheless, the option continues to resonate, particularly after US crude oil prices fell into negative territory. Continental Resources, which announced it was trimming production voluntarily, argued that brokerage house CME at the very least was irresponsible for changing how it reacts to ultra-low oil prices early this week.
“The sanctity and trust in the oil and all commodity futures markets are at issue as the system failed miserably and an immediate investigation is requested and, we submit, is required,” a company statement read.
The Trump administration is looking at all options to prop up oil prices to save segments of the US economy from collapse. The foundation of the US political system, however, means his options are limited, whether he likes it or not. Filling the Strategic Petroleum Reserve with US crude requires congressional consent in a hyper-partisan and very-divided America. The result? The Trump administration will be filling the SPR for Australia instead. And not only is the fate of the US oil sector unclear, so too is the durability of WTI as a benchmark. If the swift collapse of WTI prices early this week are repeated, and some voices in the industry say they could, waning confidence in aspects of trades may necessitate deep systemic change. This is a decidedly US-centric comment on the state of the oil sector, but as it comes from the most transparent economy in the world, it serves as a bellwether for the industry as a whole. Times they are a’changin’.