Oils Well That Ends Well; Let’s Talk Oil Prices
Recently, oil prices have dropped it like it’s hot and uh! there’s some not nice dudes, with some not nice dreams, that could finally be crashing down (thanks, Snoop Dog!). Early last month, oil prices had their largest single-day drop since 1991 when American forces launched air strikes on Iraqi troops during the Gulf War.
Why are oil prices crashing? Well, Saudi Arabia and the rest of OPEC (Organization of the Petroleum Exporting Countries — a group of 14 countries that collectively produce almost half of the world’s crude oil) couldn’t convince Russia to cut oil production amid a decrease in global demand due to the COVID-19 outbreak. From Russia without love? As retaliation, Saudi Arabia decided to slash its own oil prices — ultimately launching a price war between two of the world’s largest oil producers.
What does this mean? Lower prices when filling up our tanks — fist (gas) pump! However, OPEC determines more than how much we pay at the pump, with decisions affecting entire economies (think Venezuelan economic collapse) and the global oil industry. In fact, in response to the recent price decreases, oil markets dropped approximately 30%.
Will OPEC Trump Russia? Remember, OPEC and Russia have become much closer over the last three years as U.S. oil production grew. But will this small tiff lead to a more permanent breakup? It’s only a small trillions of dollars at stake in this potential divorce — just inching out the record previously set by the Bezos-es. Meanwhile, in the United States, the government is considering bailing out the U.S. oil industry which is facing mass layoffs and bankruptcies in the wake of the price crash. The U.S. had recently become the globe’s largest producer of crude oil and the latest blows to the industry are a major reason for the recently ended bull market and historically strong labor market. Unsurprisingly, the health of this industry is expected to be a big factor in the 2020 election and as such, President Trump does not want it to fail.
Ultimately, however, all the political handwringing, staring contests, and Zoom calls between Trump, Putin, and MBS could take a back seat to the omnipresent macro demand shock due to the current global health pandemic that could hold prices down for months.
So, is this a good thing? Our reliance on oil is fueling climate change, polluting priceless landscapes and costing billions of dollars, but lower oil prices have a mixed impact on the environment. Drilling goes down, as does the methane which is connected to climate change. However, ongoing low prices may result in a resurgence of gas-guzzling road vehicles. After all, higher prices at the pump have helped companies like Tesla increase their value proposition and further encourage consumers to make the switch to electric. Yet, with increasing concerns about climate change and the growing reluctance of investors to pour money into a sector that has strained to make profits in recent years, this pricing debacle could further hobble the industry for years to come. Silver lining: let’s hope that lower profits and hyper-volatility in the oil markets help accelerate the shift to clean energy.
Lauren Thurin, Vice President, Business Development
Move over Elon — President Trump’s tweet last week became the largest wealth moving sentence in known history. The President’s comments on a potential resolution between Saudi Arabia and Russia prompted the largest single day percentage gain on record for oil at +25%. To put this in perspective, there is an estimated $86 trillion of global assets tied to oil prices; with a flick of his thumbs Trump affected a nearly $22 trillion change in asset value.
The world’s oceans are serving as temporary oil storage as 250 million barrels sit in immobile tankers “floating” out the price crash. Commodity trading houses such as Vitol and Glencore are locking in huge profits by buying oil at current market prices, immediately selling them for a large premium in forward markets and renting tankers to serve as storage until the delivery date. Even with sky high prices for alternative storage (some ship owners have reported making more than 20x average daily rates) hyper-contango in the market has provided nimble trading houses the ability to lock in nearly riskless 20% annualized returns. The upside for the public is the net carbon effect of having huge swaths of oil tankers storing fuel rather than burning it.
Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett. Despite its arduous title, this book chronicles the story of the great financial crisis, credit default swaps and their massive impact on banks, and the 1989 Exxon Valdez oil spill in a remarkable way.
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