The GERM Report

-The mood has darkened

-Take the gold watch if you can get it.  

The news this morning was reminiscent of the dark days of spring, when US bankruptcies in the shale patch prompted calls for OPEC-like intervention in the free-market economy. Small in sample size, but huge in terms of the reverberations, Wednesday saw layoff announcements from two supermajors and a bankruptcy filing from US shale player Oasis Petroleum. Overnight, and data from the American Petroleum Institute showed demand for consumer fuels may be on the decline. In the Middle East, not only does it look like there’s a demand void, but also a leadership void with the death of the Kuwaiti emir.

Crude oil prices were hammered in the Tuesday session and the bloodletting continued into Wednesday morning. There’s been a sweeping consensus among the smart folks in the room that the price of oil is likely stuck where it is in large part because of the strains from the pandemic. After running hot toward the $45 per barrel mark mid-September, it looks like Brent is returning to an acceptance level of around $41 seen in a trading band from early this month. As of 8 a.m. ET, the global benchmark was down some 0.65% to $41.29 per barrel for the December contract.

At peak hyperbole, and at the clear bottom of the oil market this year, a handful of relatively minor producers in the shale patch joined Ryan Sitton, then an outgoing commissioner for a Texas energy regulator, in calling for federal action to stem the bleeding in the shale patch. Sitton, now peddling a book on the importance of data alone, had 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. His argument rested 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.”

It’s highly unlikely that any company, US or otherwise, that produces a vital commodity like oil would play strictly by the book. Case in point was Saudi Arabia’s scolding of the OPEC member states that continue to skirt their curtailment obligations. Break-even prices, meanwhile, show there are winners and losers in the current market. Feeling the squeeze downstream, Marathon Petroleum stated it was trimming some 350 headcounts from its US refining segment. Citing “historically low global energy demand and commodity prices,” shale oil producer Oasis Petroleum announced it was filing for Chapter 11 bankruptcy. In the midstream sector, US pipeline companies were taking the cue from the likes of Iraq and Saudi Arabia, which each lowered their official selling prices, by offering incentives to shippers to keep products moving through their networks at a time when demand is showing few signs of improvement. Putting lipstick on the pig by way of touting a green streamlining agenda, Royal Dutch Shell said it planned to cut as many as 9,000 jobs by the end of 2022, and some 1,500 have already agreed to just take the gold watch now. US private payroll processer ADP reported Wednesday there were signs of life in the economy. There was a slight improvement in US GDP during the second quarter and a jump in the Chicago PMI, these are uncertain times so temper your enthusiasm.

Outside the United States and S&P Global Platts finds demand in Asia could be close to climbing back. Oil demand in the region climbed 680,000 barrels per day in 2019, is expected to plummet by 1.7 million bpd this year but recover to around 500,000 bpd or so next year. Most of that increase is expected from China and India. In China’s case, it remains the lone bright spot in the global economy. But hammered by the pandemic, we wonder if India will indeed show marked improvement next year. And while refinery maintenance may explain some of the build, we wonder if the bloated storage levels in Saudi Arabia are indicative of lackluster, or at least tepid, demand in Asia.

On geopolitical issues, we’ve spent several weeks examining whether the so-called Arab pivot to Israel was stabilizing or destabilizing to the region. In international relations theory, a system where the demarcations of alliance are fluid is prone to frequent, but relatively minor skirmishes. A system where the demarcations of alliance are clear, meanwhile, is prone to short, but major fighting. The latter is how we view the normalization of relations with Israel. With the United States considering closing its embassy in Baghdad, foreign policy under Trump is ceded to others to a large degree. The lack of any real influential presence to moderate regional behavior opens the door to adventurism by lesser powers. The death of Kuwaiti Sheikh Saba al-Ahmad al-Jaber al-Sabah only adds to the leadership question. Analysts don’t expect much in a change in oil policy from the OPEC member, but given the late emir’s penchant for diplomacy, there could be a void opening during the political transition.