“At the appropriate time I’ll get involved”, Donald Trump said Thursday, of the oil price war between the Saudis and the Russians, a spat which served as the final blow to fragile sentiment, tipping markets into chaos two Mondays ago.
“It’s very devastating to Russia, because the whole economy is based on that, and they have the lowest prices in decades”, Trump mused. “I would say it’s very bad for Saudi Arabia, but they’re in a fight”.
It’s not clear Trump’s assessment is wholly accurate if he meant to suggest that Riyadh is in a better position to weather a storm (of their own making) than Moscow. While the Saudis have the spare capacity advantage, they do not have the fiscal upper-hand. Riyadh would end up running something on the order of a 15% deficit in 2020 if Brent stays at $35 and Mohammed Bin Salman doesn’t cut spending. The kingdom is targeting a 6.4% fiscal deficit this year, a figure that assumes Brent at $65.
In any event, between Trump’s rhetoric, the administration’s pledge to splurge on $3 billion of oil for the SPR and tentative evidence that Mideast players are bending as the pressure mounts, crude surged the most in more than a decade Thursday.
Steve Mnuchin is excited, that’s for sure. “Let’s go out and buy”, he told Fox, in an interview. “Fill up the reserve”. Steve is pushing Trump to ask Congress to spend some $20 billion buying up oil in order to top off the SPR for the next decade, apparently.
“At $22 for WTI crude we should be filling up the reserve for the next 10 years”, Mnuchin explained. “We are energy independent, but obviously at these prices we’re going to have issues producing energy”.
Yes, “obviously”. As Bloomberg notes, “at today’s prices, $20 billion could buy more than 800 million barrels of oil — far exceeding the reserve’s total capacity of 713.5 million barrels”.
Futures were up nearly 25% at one juncture, and ended up having their best day in history.
Some of this surge is obviously due to prices snapping back from deeply oversold territory, and really, it’s impossible to divine much from price action across any asset in the current environment.
Any bounce will be viewed with extreme skepticism. After all, the world is headed for a recession, which entails across-the-board demand destruction, and so far, nobody has truly swerved in the game of chicken between Moscow and Riyadh.
Trump’s efforts are likely to intensify, though, as some production in the US becomes wholly uneconomic and weak hands are shaken out once the credit market slams shut to all but the most well-regarded borrowers.
I mean sure fill up the reserves but if you want to stabilize prices for US producers why not exclusively buy US shale oil at say $45. What precisely is the point in buying a few billion worth from the Saudi’s or Russian’s? As for getting “involved” I’m pretty sure he’s got about as much control over his two daddies as he does over the coronavirus.
Agree. If we buy at today’s price it will put many oil companies into bankrupcy. What’s Manuchin thinking?
bankruptcy
25% sounds like a big move until you reaize is was from a $20 base. That would be less than 10% on the average price over the last 3 months of 2019 and into January …
I looked as far back as I could at oil futures, back to April of 1983, on Thinkorswim. OIl has never been lower than the $30-33 handle during this time frame. That period covers a lot of downturns and the drop is mind boggling. Let the zombies die, oil or otherwise. It’s been the continuous pumping of liquidity that has sparked the current crisis.
Why do I remember a $6 handle shortly after 9/11?
The price of oil was substantially under $20 per barrel in November of 1998.
The lowest it fell after the 9/11 attacks was the high 20s.
And inflation biases perspective. I remember reading, during that period in the late nineties, that adjusted for inflation, that was the lowest price for gasoline we had ever! paid in Canada.