The GERM Report

Risk level: RED

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

THE BOOSTER SHOT

-If this is indeed Trump’s oil deal, let him have it.

-Crude oil prices got support last week from quarantine easing.

The narrative that US President Donald Trump bullied Saudi Arabia into ending its price war with Russia continues. Russian reluctance to embrace formal cuts with OPEC+ players unraveled an alliance that helped stabilize the oil market for the better part of five years. The end of the marriage between two of the world’s leading oil states prompted an export free-for-all, with both sides opening the spigot all the way to grab market share. With oil markets cratering, Trump on April 2 warned Saudi Arabia that military support was on the line unless it played nice again with Russia. That same day, he took to social media to declare 10 million barrels per day in cuts were in the works. That sent the price of Brent crude oil up some 21% and ultimately led to a diplomatic handshake that eventually brought dozens of producers from OPEC to the G20 to agree in production cuts. The problem, however, is that the arrangement came far too late.

Pacific and European economies opening up after weeks of isolation gave crude oil prices a lift last week. On Friday, an agreement to trim 9.7 million bpd from the market went into force, alleviating some of the concerns about the lack of storage space. All told, the bullish signals aligned to send the price of Brent up some 23% to end trading on Friday at $26.44 per barrel.

A senior US official speaking to Reuters on condition of anonymity said the Trump administration warned Saudi Arabia that “there would be no way to stop the U.S. Congress from imposing restrictions that could lead to a withdrawal of U.S. forces” unless a production deal was made with Russia. That same day, April 2, the US president took to Twitter to declare that Saudi Arabia and Russia were expected to cut production. Curtailments, he said, could be as high as “15 Million Barrels [per day]. Good (GREAT) news for everyone!” Brent crude shot up 21% as a result, the largest single-day gain of the year.

Twelve days later and Brent lost 24% after a trading anomaly sent the US benchmark into negative territory. Producers in theory had to pay its customers to take oil away. Since the April 2 phone call with the Saudi kingdom, Brent is up just 4%. For the year, Brent is down 61%, plummeting from $66 per barrel to start the year to just under $26 per barrel early Monday. The day before the much-heralded phone call, April 1, US shale producer Whiting Petroleum reached an in-principle agreement with its shareholders to pursue financial restructuring. Four weeks later, Diamond Offshore Drilling Inc. followed suit and entered into Chapter 11 bankruptcy proceedings.

The April 2 phone call was preceded by pressure from a handful of Republican senators presiding over oil-producing states such as North Dakota. On March 20, US Sen. Lisa Murkowski, R-Alaska, the chair of the Senate Energy Committee, joined eight other members of the GOP in calling on Commerce Secretary Wilbur Ross to “investigate the excessive dumping of crude oil by the Kingdom of Saudi Arabia and the Russian Federation and develop a swift reply.” A week later, US Sens. Kevin Cramer, R-N.D., and Dan Sullivan, R-Alaska, introduced a measure to remove US military forces from Saudi Arabia.

“Saudi Arabia has shown indifference, if not malintent, for American energy producers during its feud with Russia,” Cramer said in a statement.

Trump is a reactionary, not a visionary, president. Few, if any, of his policy decisions have been successful. Global greenhouse gas emissions are lower, but because of the demand destruction brought on by quarantines not because of the US withdrawal from the Paris climate deal. The Middle East remains a hotbed of insurgency and conflict, with Iran seemingly able to strike deep into the heart of Saudi oil turf. That belligerence from the Islamic republic is the result of the breakdown of the Iranian nuclear agreement that has done little to bring Tehran back to the table of diplomacy. The presumptive end to a Chinese trade war credited with dragging down the global economy is at risk of unraveling as the president mulls new tariffs. On the coronavirus, the Trump administration has been questioned, if not openly ridiculed, for its response, with the president himself suggesting that ingesting lethal disinfectants may be worth examining. To give this president credit for driving a production agreement among the world’s largest oil producers then is to do so with a note of irony.

“The sense is that there is a firm conviction that oil prices will recover, yet how many bankrupt producers will be able to take advantage of it?” asked Phil Flynn with The Price Futures Group in Chicago on Monday.

Marathon Petroleum last week started to shutter its 157,000 bpd refinery in Martinez, Calif., in response to the quarantine economy. The refinery produces very little jet fuel, for which demand has almost entirely collapsed, and feeds the normally-bustling San Francisco market, so the shuttering is a bellwether of sorts. Chevron, ConocoPhillips and Exxon Mobil, three of the US supermajors, announced plans to trim billions of dollars in capital expenditures. The US rig count is down some 52% over the last seven weeks for its swiftest decline in five years and production in the country is already down some 1 million bpd. The Journal of Petroleum Technology last week suggested that, even if the market recovers, bringing wells back to life in the US shale patch is a difficult task at best.

On April 3, one day after the US president’s phone call to Saudi Arabia, IEA Executive Director Fatih Birol told Reuters that “even the numbers people are talking about may not be enough to find a solution to the problem.” By January, most world leaders were publicly acknowledging the growing threat from the coronavirus. As late as November and the US intelligence community knew something was up. Trump has pivoted from chastising OPEC for artificially keeping the price of oil too high to praising its work to keep the price of oil from going too low. Now, the administration is mulling de facto buyouts of struggling energy companies and later this week, Texas legislators will consider state intervention in the oil sector. This is a new world. This is Trump’s America and, looking at the collateral damage in the marketplace, the oil deal of the century is indeed his.

US factory orders are on pace for a severe contraction as quarantines continue. Sweden gives a flash reading of GDP on Tuesday and we’ll also get a look at the trade balance in the North American economies. Wednesday brings the usual EIA data and we’ll see how close to the top we’re getting in Cushing. With Norway announcing a cap on production to meet its G20 commitments, the rate decision Thursday from the country’s central bank could be an interesting read. And again, first-time claims for unemployment in the United States should be staggering this week. As will be the case until this thing is over, a Red alert is in force with Brent expected to move by at least +/-4% on the week.