It was quite the game-changing plot twist last Friday in Vienna when relatively polite discussions turned into a de facto OPEC+ meltdown.
By Pepe Escobar
Special to Consortium News
Is the planet under the spell of a range of Black Swans – a Wall Street meltdown caused by an alleged oil war between Russia and the House of Saud, plus the uncontrolled spread of Covid-19 – leading to an all-out “cross-asset pandemonium,” as billed by Nomura, the Japanese holding company?
Or, as German analyst Peter Spengler suggests, whatever “the averted climax in the Strait of Hormuz had not brought about so far, might now come through ‘market forces’”?
Let’s start with what really happened after five hours of relatively polite discussions last Friday in Vienna. What turned into a de facto OPEC+ meltdown was quite the game-changing, plot twist.
OPEC+ includes Russia, Kazakhstan and Azerbaijan. Essentially, after enduring years of OPEC price-fixing – the result of relentless U.S. pressure over Saudi Arabia – while patiently rebuilding its foreign exchange reserves, Moscow saw the perfect window of opportunity to strike, targeting the U.S. shale industry.
Shares of some of these U.S. producers plunged as much as 50 percent on “Black Monday.” They simply cannot survive with a barrel of oil in the $30s – and that’s where this is going. After all, these companies are drowning in debt.
A $30 barrel of oil has to be seen as a precious gift/stimulus package for a global economy in turmoil – especially from the point of view of oil importers and consumers. This is what Russia made possible.
And the stimulus may last for a while. Russia’s National Wealth Fund has made it clear it has enough reserves (over $150 billion) to cover a budget deficit from six to 10 years – even with oil at $25 a barrel. Goldman Sachs has already gamed a possible Brent crude at $20 a barrel.
As Persian Gulf traders stress, the key to what is perceived in the U.S. as an “oil war” between Moscow and Riyadh is mostly about derivatives. Essentially, banks won’t be able to pay those speculators who hold derivative insurance against a steep decline in the price of oil. Added stress comes from traders panicking with Covid-19 spreading across nations that are visibly unprepared to deal with it.
Watch the Russian Game
Moscow must have gamed beforehand that Russian stocks traded in London —such as Gazprom, Rosneft, Novatek and Gazprom Neft —would collapse. According to Lukoil’s co-owner Leonid Fedun, Russia may lose up to $150 million a day from now on. The question is for how long this will be acceptable.
Still, from the beginning Rosneft’s position was that for Russia, the deal with OPEC+was “meaningless” and only “cleared the way” for American shale oil.
The consensus among Russian energy giants was that the current market setup —massive “negative oil demand,” positive “supply shock,” and no swing producer — inevitably had to crash the price of oil. They were watching, helplessly, as the U.S. was already selling oil for a lower price than OPEC.
Moscow’s move against the U.S. fracking industry was payback for the Trump administration messing with Nord Stream 2. The inevitable, steep devaluation of the ruble was gamed — also considering the ruble was already low anyway.
Still, what happened post-Vienna essentially has little to do with a Russia-Saudi trade war. The Russian Energy Ministry is phlegmatic: move on, nothing to see here. Riyadh, significantly, has been emitting signs the OPEC+ deal may be back in the cards in the near future. A feasible scenario is that this sort of shock therapy will go on until 2022, and then Russia and OPEC will be back to the table to work out a new deal.
There are no definitive numbers, but the oil market accounts for less than 10 percent of Russia’s GDP (it used to be 16 percent in 2012). Iran’s oil exports in 2019 plunged by a whopping 70 percent, and still Tehran was able to adapt. Yet oil accounts for over 50 percent of Saudi GDP. Riyadh needs oil at no less than $85 a barrel to pay its bills. The 2020 budget, with crude priced at $62-63 a barrel, still has a $50 billion deficit.
Aramco says they will be offering no less than 300,000 barrels of oil a day more than their “maximum sustained capacity” starting April 1. They say they will be able to produce a whopping 12.3 million barrels a day.
Persian Gulf traders say openly this is unsustainable. It is. But the House of Saud, in desperation, will be digging into their strategic reserves to dump as much crude as possible as soon as possible — and keep the price war full tilt. The (oily) irony is that the top price war victims are an industry belonging to the American protector.
Saudi-occupied Arabia is a mess. The Wall Street Journal reported Friday that one of the king’s brothers, Prince Ahmed bin Abdulaziz al Saud, and a nephew, Prince Mohammed bin Nayef, two powerful Saudis, were arrested and charged with treason for allegedly plotting against King Salman and his son, Crown Prince Mohammed bin Salman (MbS).
Every grain of sand in the Nefud desert knows Jared of Arabia Kushner’s whatsapp pal MbS has been de facto ruler for the past five years, but the timing of his new purge in Riyadh speaks volumes.
The CIA is fuming: Nayef was and remains Langley’s top asset. The fact that Saudi regime spin denounced “Americans” as partners in a possible coup against MBS should be read as “CIA.” It’s just a matter of time before the U.S. Deep State, in conjunction with disgruntled National Guard elements, comes for MbS’s head — even as he articulates taking over total power before the G-20 summit in Riyadh next November.
Black Hawk Down?
So what happens next? Amid a tsunami of scenarios, from New York to all points Asia, the most optimistic rule is that China is about to win the “people’s war” against Covid-19, and the latest figures confirm it. In this case global oil demand may increase by at least 480,000 barrels a day.
Well, that’s way more complicated.
The game now points to a confluence of Wall Street in panic; Covid-19 mass hysteria; lingering, myriad aftershocks of President Donald Trump’s global trade mess; the U.S. election circus; and political instability in Europe. These interlocked crises do spell Perfect Storm. Yet the market angle is easily explained as perhaps the beginning of the end of the Fed pumping tens of trillions of U.S. dollars into the economy through QEs and repos since 2008. Call it the calling of the central bankers’ bluff.
A case can be made that the current financial panic will only subsidize when the ultimate Black Swan – Covid-19 – is contained. Borrowing from the famous Hollywood adage — “no one knows anything” — all bets are off. Amid thick fog, and discounting the usual amount of disinformation, a Rabobank analyst, among others, came up with plausible four Covid-19 scenarios. He now reckons it’s getting “ugly” and the fourth scenario — the “unthinkable” — is not far-fetched anymore.
This implies a global economic crisis of, yes, unthinkable magnitude.
To a great extent it will all depend on how fast China – the inescapable crucial link in the global just-in-time supply chain — gets back to a new normal, offsetting interminable weeks of serial lockdowns.
Despised, discriminated, demonized 24/7 by the “system leader,” China has gone full Nietzsche – about to prove that “whatever does not kill you makes you stronger” when it comes to a “people’s war” against Covid-19. On the U.S. front, there’s scant hope that the gleaming Black “helicopter money” Hawk will crash down for good. The ultimate Black Swan will have the last word.
Pepe Escobar, a veteran Brazilian journalist, is the correspondent-at-large for Hong Kong-based Asia Times. His latest book is “2030.” Follow him on Facebook.
The views expressed are solely those of the author and may or may not reflect those of Consortium News.
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Payback for Nordstream 2 and years of sanctions.
Why should Russia help the US and the Saudis?
Always enjoy reading articles by Pepe and thank you CN for posting them.
Black Swans indeed are flying around .
In October last year I suggested the collapse of the North American economy was a certainty.
I suggested that the main reason was that the complete island of Japan has been contaminated with radioactive fallout from the The Fukushima Daiichi nuclear disaster. I suggested that the Olympics would be cancelled because the Japanese government needed to control the media discussion of this fact and could not have independent journalists who arrived to cover the Olympics begin covering the nuclear accident using Geiger counters.
There are more than 200 nuclear fuel rods suspended more than 100 feet in the air and the extremely high temperature (4000 F.) of the fuel rods are being cooled with a Gazillion gallons of water each and every minute and for the past 8 years. Water is entering the air as steam and then condensing and returning to the ground as morning dew and/or rain. The robots required to remove these fuel rods have not even been invented yet.
I had thought that the U.S. recognized this eventuality and would decide to attack Iran and thus blame the cancellation of the Olympics on this attack against Iran.
However; this COVID-19 virus will have the same result as an attack against Iran.
If the independent bloggers/media proves that the complete island of Japan is contaminated, there would be 35 million people lined up on the shore looking for a boat and would result in the total collapse of the Japanese/U.S. economy.
This COVID-19 might accomplish the same results as what my forecast last October mentioned.
If a tenant living in the same apartment building as I do tests positive for this virus, the complete apartment complex will be shuttered and quarantined.
On January 27th I purchased 13 ounces of physical gold which was Listed at 2,082.74 Canadian dollars per ounce. (Today it is listed at 2,262.35 per ounce.)
It is not Russia but SA shooting itself and U.S. shale producers in the head. MBS is collapsing without knowing it….
Imagine how many billions a trader who had the inside info could have made by shorting the market. Moscow knew at least a week before the rest of the world what would happen. Remarkable how the USD didn’t strengthen over the turmoil.
Also nothing better to kick start the Chinese economy than lower energy prices.
As shown in this article, central bankers may be using the coronavirus as an excuse to dramatically change the world’s monetary system:
The current outbreak of COVID-19 could be just the excuse that they need to justify the massive change.
If indeed this virus was orchestrated ,just think of the insider trading that could have been done.
Here is a global perspective on the US economy and the CoronaVirus.
Pepe, you’re always a delight to read. I see the US as hosed. The fracked oil will dry up as the fracking companies go belly up forcing the US to once again be on the open market for oil only this time not everybody is going to be willing to take US dollars for their oil. Next question. Where’s the US going to get the money to pay for the oil? Back in the ’70s, the US was the largest market for oil and we could get the world to support our oil habit because (a) we were still well regarded as a global neighbor and (b) because we were the largest market, we had borrowed a $1M from the bank and thus owned the bank – so we could dictate the rules. Neither (a) nor (b) is true anymore. Finally, there will be lots of defaulting on debt (be it the primary debt or the derivative debt of the insurance against an event just such as this one. The big banks will be in deep yogurt.
Excellent question: “. . .not everybody is going to be willing to take US dollars for their oil. Next question. Where’s the US going to get the money to pay for the oil?”
The use of the $US in trade was slowing down, but not by a great deal. If the US needs to buy oil it will surely refuse to pay in foreign currencies andcan print more $US, but that will further erode confidence in the US and the $US, and confidence or lack of same drives the whole game.
Where will the US go for its oil? Invade Venezuela, the Koch refineries in Corpus Christi Texas are desperate for heavy Venezuelan crude. Saddle up, warmongers, time to spread some more democracy.
Thanks, Pepe and Consortium. Wild and wooly. Tverberg’s latest linked from fb to somewhere (not to her site evidently?) gives me “This website has been reported as unsafe.”
Every day I have a strong warning which I ignore-I take it as a compliment!
Pepe is wonderful and this latest act by Russia raises my hopes .
“Moscow’s move against the U.S. fracking industry was payback for the Trump administration messing with Nord Stream 2.”
Escobar seems to say that the current steep decline in oil price was purposefully initiated by Russia. Other articles I’ve read have stated that it was the Saudis that wanted Russia to reduce their production to prop up the price of oil and the Russians refused, which angered MbS so much that he unilaterally reduced the price of oil and increased production. MbS did something similar to damage U.S. shale oil producers a few years ago.
I wonder who really initiated this oil crisis. Frankly, it seems out of character for Russia to create instability in the oil markets but fits the rash and overconfident MbS style.
“Other articles I’ve read have stated that it was the Saudis that wanted Russia to reduce their production to prop up the price of oil and the Russians refused”
This was my understanding after reading Tom Luongo’s piece on the Russians finally saying NO.
Definitely it was Russia, and planned as Pepe explained. Why help Trump’s unfair sanctions on Nordstream and the destructive fracking in the USA while Russian wells were idle? It is not instability but a big drop which the Russian economy can take and the others cannot (though consumers may be pleased with cheaper fuel.)