The Daily Dose

-China chums the oil waters.

-WTI may be on life support as a benchmark.

Retail investors leap-frogged to late-month contracts for WTI, devastating the US benchmark for the price of oil. A perfect storm of market competition, demand destruction and technical trading parameters has brought the US oil sector to its knees. And it’s getting political. Politico and The Washington Post leaked a 57-page memo from right-leaning members of the Republican party describing how to take a xenophobic approach to the coronavirus by deflecting the blame to China. For Beijing, the buyer’s market for crude oil means geopolitical opportunities. An editorial in the South China Morning Post says it’s time to pit all of the major oil producers against one another. Beijing, the post read, “would be foolish not to expect anything in return” for propping up the Russian, Saudi and US energy sectors with crude oil purchases. From the Chinese perspective, the world owes it a favor.

The price for Brent crude oil hurried back into contraction to start the week amid grave earnings reports and weak manufacturing data from the United States. The global benchmark was down about a half percent as of 8 a.m. ET to trade at $22.80 per barrel. Front-month contracts remain below $40 per barrel for the foreseeable future, though the slow return of economic activity could lower the spread between spot and future prices.

The United States Oil Fund stated in a regulatory filing to the Securities and Exchange Commission that it was shifting its positions from the June contract for West Texas Intermediate to staggered holdings across July 2020 and June 2021 because of regulatory and brokerage limits. It left the possibility of a further embrace of WTI in doubt.

“While it is USO’s expectation that at some point in the future it will be able to return to primarily investing in the Benchmark Futures Contract or other similar futures contracts of the same tenor based on light, sweet crude oil, there can be no guarantee of when, if ever, that will occur,” its statement read.

That left visible wounds on the US contract just as the bruises from last week’s negative price plunge were healing. WTI was trading down some 15% an hour or so before the start of trading in New York. The retreat from US crude oil has raised doubts about the durability of WTI as a benchmark for US economic conditions. Though not the first time that WTI has come into question, the extreme volatility means diminished confidence in the contract.

“The real concern about the contract’s price move was not that prices went negative but that they dropped by so much, so quickly,” Reuters oil analyst John Kemp wrote last week. “No trader can protect themselves against such moves, other than by not running a position at all.”

But WTI’s dip into negativity may indeed be reflective of the US energy sector as a whole. Energy companies are slashing investments in the Permian basin in the United States and shutting in wells at a rapid clip in order to reduce commitments during one of the worst economic crises in generations. Diamond Offshore on Monday became the latest US casualty, announcing it was moving forward in Chapter 11 bankruptcy proceedings. All told, production losses from the US shale patch suggest the national goal of energy dominance is fleeting. As with global hegemony, those that make a bid for superiority usually fail because the bid encourages collective balancing against the aggression.

China, meanwhile, may be sensing an opportunity to politicize the current economic situation. The global pandemic has created an opening from major powers to punish their weaker adversaries when they’re down. This is indicative in continued US pressure on Iran and Venezuela. And it’s indicative of Chinese policy on the United States and other major producers. China relies on imports to satisfy some 70% of its oil demand in the domestic economy and it’s a buyer’s market (though where to put your purchases is an open question). An editorial in the South China Morning Post said Beijing should be exploiting the conditions.

“Given the dire situation of the energy industries in the three countries, it is hard not to see Beijing playing them off against each other,” the piece read. “At the very least, China may demand a quid pro quo with the Americans to ease off on their hostile rhetoric over Covid-19 and treatment of Chinese hi-tech companies in the US. It would be foolish not to.”

A much-lauded trade deal brokered by the Trump administration volunteers China for $18.5 billion more on US energy purchases and, given the current destruction in the US shale sector, a steady buyer is necessary to survive. Already, some in the US shale patch are begging for mercy and thanking OPEC producers for agreeing to stem production to help steady the markets. The need for a steady Chinese economic partner flies in the face of GOP strategy that describes the coronavirus as a “hit-and-run” job by Beijing.

But there may be some signs of hope for the global economy, and for the appetite for oil and fuels. Global oil demand is expected to decline more than the pledged 10 million barrels per day in cuts from OPEC+, and some non-state sectors are shutting in barrels due to market factors. That eventually eases the glut. The OPEC+ agreement goes into force later this week and should help re-establish the foundation under oil prices. Italy is slowly returning to life, New Zealand dodged the bullet and German retailers are looking to re-open. And while the United States is wrestling with a too-much-too-soon reopening, some parts of the manufacturing sector may be back online in a matter of weeks.


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