Weaponising the oil price just as coronavirus crushes the economy

Last week’s Exponential Investor headline read “The Fed pumps, the market dumps”. This week it was the Saudis and Russians doing the pumping, of oil. But the markets dumped again. Even more, this time.

Thanks to the Russians, OPEC failed to come to an agreement to cut oil production. This with a large drop in oil demand forecast for the first quarter of 2020, possibly the largest ever.

The Saudis reacted badly to Russia’s snub and so an oil glut is in the works. The price fell 30% overnight.

Cue stockmarket chaos. US stocks had to halt trading both in futures and stocks because the plunge was so bad. UK stocks opened down 8%.

But I’m not sure that’s where our attention should be just now. Hard as it may be to look away.

Oil has a history of being used as a weapon of geopolitical and economic warfare.

On Christmas Eve last year, when my German mum asked my Japanese in-laws why they had attacked Pearl Harbor, they explained that the US had cut off Japan’s oil supplies. It was a great evening.

President Ronald Reagan and Saudi Arabia did the opposite to Russia in the 80s, tanking the oil price to undermine the Soviet Union.

Today, we may be seeing Vladimir Putin’s sweet crude revenge. The US’s gas and oil boom is now a money-losing machine. At the worst possible time economically. And politically, for some.

Meanwhile, Iran’s regime is in dire financial straits too. It relies on oil revenue to keep the people happy, more or less. But there will be a lot less money coming in.

So it looks to me like the oil pump and dump is another coordinated effort. Oil producers and Russia both have enemies who can’t afford lower oil. And so lower oil we’ll have.

Cue markets in the US getting hammered as much as everyone else, for once.

Can the renewables sector afford the plunge? I asked our renewables analyst Kit Winder. For once, we agreed. For a while…

The oil price isn’t just plunging. It’s also just generally unstable thanks to geopolitics. As is the oil supply itself. That’s not ideal, even if the situation includes oil price plunges too.

Renewable energy is a lot less geopolitically chaotic. Its power is transported less far, through less sensitive choke points, by friendlier governments. Besides, renewable energy’s cost base is plunging too.

The fly in the ointment is that governments are only competent when they’re competing against each other – trying to do things like sinking the oil price to sabotage the US and Iran.

Renewables backed by governments will find a way to fail because they’re government-backed programmes. That’s the way all government-backed programmes eventually go, especially green ones.

Back to the economy.

Regardless of the motivations of the oil price plunge, it looks like the oil industry is now the seat of coronavirus risk. It’s all about the effect on the economy, not just financial markets.

Coronavirus is about to hit economic data. All of the disruptions it’s caused will suddenly show in up places like GDP, jobs and company alerts. It’s suddenly going to matter in an economically measurable way.

The lower oil price should help most of the economy. Energy prices are a major expense, after all.

But that relief comes at the expense of oil companies. All the defaults that could’ve happened at oil-using companies like airlines, shipping companies and mining could now happen in the oil industry instead. Oil has become the place to watch for a snowflake that starts the avalanche.

Not that you should be waiting for an avalanche to start before running away.

Instead, your financial decision making should be guided by something far more stable than human perception during a pandemic. Far more reliable than my analysis too.

But what’s that alternative? How do you take measured action in the face of something as hard to measure as the financial and economic impact of Covid-19?

Find out here.

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Energy

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