The GERM Report

-A fear factor may be at play in the price of oil.

-The quarantine economy knows no quarter.

First quarter GDP in the United States showed a 4.8% contraction, Germany – Europe’s largest economy – could post a 6.6% dip this year and Saudi Arabia reported that oil revenues were down 24% year-on-year. The quarantine economy of early 2020 knows no quarter and it’s changing the dynamics of the game. State intervention in what would otherwise be a free market is under serious consideration. Leadership aptitude is in doubt. And there’s a sense of panic beneath the current that could destroy investment faith in a way that nothing else can.

Brent crude oil again was showing signs of life, trading up some 3.3% as of 8 a.m. ET to $23.50 per barrel. The global benchmark may be following equities higher on expectations the US Fed will adopt a whatever-it-takes stance on economic policy.

Global stocks were on the rise in early Wednesday trading in anticipation of a flurry of earnings reports, global GDP data and comments from US Federal Reserve Chairman Jerome Powell. US interest rates are already close to zero and the Fed has turned its attention to bond purchases to help stabilize the market. Apart from a list of tools available to stave off a more severe depression, a messaging campaign that leaves investors with a sense of confidence may be needed.

The US shale state of Oklahoma has considered a rationing system for crude oil production and Texas policymakers take up this issue next week. Already, however, global majors are trimming output because of market factors. BP, which holds assets in OPEC+ states, announced earlier this week it was expecting lower volumes in the second quarter, in part because of voluntary production constraints from countries such as Azerbaijan. On Wednesday, Enterprise Products Partners announced it was trimming capital spending by $1 billion for 2020. Jim Teague, the company’s co-CEO, said gas and crude oil production is expected to drop faster than during previous shocks and his company “will not be immune” to current economic ailments.

“While OPEC+ recently agreed to reduce production by approximately 9.7 million bpd beginning in May 2020, this is too little, too late,” he said in a statement. “The OPEC+ production cut is a fraction of the estimated 25 million bpd of crude oil demand destruction associated with the coronavirus.”

Even Saudi Arabia is feeling the pain. The country reported that oil revenues declined by 24% year-on-year and the International Monetary Fund has suggested it needs oil priced at $85 per barrel to balance its books. According to The Soufan Center, some of the policies embraced by Saudi Crown Prince Mohammed bin Salman are “amateurish and naïve.” That may extend into the Saudi-Russia price war that coincided with the epic demand destruction brought on by the coronavirus. And with nationalist and authoritarian voices drowning out their more liberal counterparts, the trading public at large is left without a rudder and left to panic.

A system without a worthy overseer is a system rife with uncertainty. Commenting on the April 20 trade anomaly that pushed WTI prices into negative territory, The Oxford Institute for Economic Studies stated that there may be an emotional factor compounding the demand destruction, lack of storage and battle for market share that pushed crude oil prices to historic lows. Apart from technical and market factors, the report indicated that “some panic, as well as inexperience with the delivery mechanism in the WTI contract, may have been involved.”

Language and perception can steer markets in ways that few other factors can. A persistent use of social terms turn into social habits as language gives us a way to see the world and in turn influences the process of thinking. Speaking about a particular social reality means acclimation of that perception and the perception in the current era is one of fear. Because the notion of self-preservation is an over-riding one, negativity shifts the focal point to the unpleasant aspect, which in turn sharpens the focus on negative events. Negative mechanisms induce negative states, and the negativity of WTI may be a case in point. As the Oxford study suggest, part of the deep contraction may be the “some panic” is involved.