Today’s market action should be seen in the context of a massive geopolitical cage fight for share in the crude oil market globally.
Saudi Arabia is losing its long-held position as the oil market leader to the Untied States and Russia. MBS is not happy and somewhat petulantly decided to flood the market with oil.
Russia is not happy with America’s rise to the number one producer of crude in the world. America has stopped the Nord Stream II pipeline, at least temporarily, that was intended to provide natural gas to Germany, which would make the NATO member even more dependent on the Kremlin for energy. Moscow is also unhappy with American pressure on its client state – Venezuela. In addition, the Trump administration’s ‘maximum pressure’ campaign on another Russian ally – Iran – has also hurt the Kremlin’s pocketbook and geopolitical influence.
For its part, the Trump administration has been pressuring Saudi and other producers to pump more to reduce the price of crude on international markets. It looks now like the old saying ‘be careful what you wish for’ is apropos.
An oil price below $40 per barrel is bankruptcy territory for many American shale producers.
This crisis was building even before the coronavirus outbreak happened (or was instigated); the epidemic simply hurried the process along.
These tectonic shifts in the geopolitical great game are what are driving today’s market action — because they create extreme uncertainty. Financial markets hate uncertainty.
It will be interesting to see the Trump administration’s reaction to Russia and OPEC pumping more oil to hurt American shale producers. POTUS could very well announce some type of financial assistance for his pet project – making America energy independent. It is doubtful Trump will take this lying down.
If the world should have learned anything over the last few years, it is that Trump always thinks several steps ahead of the competition and should not be underestimated.
Although Russia has weaned itself off the USD-based global financial system in many ways, they still have large exposure financially, even though Moscow has been very prudent with its fiscal and monetary policy, having almost no debt and large ‘rainy day’ funds available for use. Former Russian Prime Minister Dmitry Medvedev famously declared, “American sanctions on the Russian banking system would be an act of economic war.”
The 30,000 picture is that coronavirus will most likely fade into the summer. The Trump economy will continue to roar and America will continue to come back energy and manufacturing wise. This crisis will force us to become more resilient as far as supply chains and medical security is concerned.
That can only be a good thing for what doesn’t kill you makes you stronger.