The opposite of ‘America first’
Russia and the Saudis have hit us when we (our shale oil and biofuel industries) were vulnerable from a global recession with their crude oil price war.
Their crude oil price war will leave a mark. The global economic slowdown will reduce world oil consumption by 10 million barrels/day or more. There was going to be a global recession anyway so they are making use of the crisis for maximum damage to try to recapture market share lost to the U.S. shale oil industry. Who is their target? U.S. shale oil and biofuels industries and U.S. oil independence. The U.S. shale oil industry had brought the U.S. to the cusp of oil independence where we were actually starting to compete for global market share of crude oil exports.
The U.S. shale oil industry was quite profitable at $50 barrel, could survive temporarily on $40 barrel ($37 barrel cost of production) and will be in dire straits given sub-$30-barrel oil. Oil supply/demand may now be so unbalanced that it will take crude oil in the teens/barrel to wash out. Low prices will have to cure low prices. The problem is that the U.S. petroleum demand is limited as to how it can respond to cheap oil by the coronavirus epidemic shutting the country down. High cost producers will scream “uncle” and file bankruptcy which is really what the Russians/Saudis want to happen.
Given the level of investment needed for shale oil development the industry is highly leveraged. The old Kerr McGee of my college gas war days was bought out by Anadarko which was more recently bought out by Occidental whose stock was just recently trading 16.78% of its May 2018 high. That is a crash. The company is slashing capital spending and dividends. Carl Icahn owns 10% of the Oxy shares. That tells me that he will be talking to his buddy Donald Trump asking him to get Putin and the Saudi Prince MBS to knock off their crude oil war.
Trump is buying oil to fill the Strategic Petroleum Reserve and promised other financial help to the oil industry. He has been favoring them with RFS RIN waivers.
The Saudis can pump oil for $4 barrel but need $70 barrel to cover their national budget and maintain the sheiks lavish lifestyles. The Saudis have $500 billion in cash reserves which will get them by for a while. They claim Aramco can produce $63 billion in free cash this year at $30 barrel. Russia needs $42 barrel to cover its budget but claims to have cash reserves to get by with $30 barrel oil for a decade. I doubt that. The Saudis went to the last OPEC meeting proposing to reduce oil production further extending the period of time for the cut. It was the Russians that balked, saying “Nyet!” They were tired of cutting back and losing market share. The Saudi price MBS told them that they would regret it and promised that Saudi Arabia would then flood the world market with oil boosting production.
The geopolitics behind this oil price war goes deep. Russia is miffed that the U.S. has used sanctions to block a gas pipeline from Siberia to Germany called Nord Stream 2.
We have also blocked Russian oil companies from selling Venezuelan crude. This oil price war is Putin’s way of hitting back. Russian officials commented, “Let’s see how American shale oil exploration feels under these conditions”.
The U.S. oil industry is being battered. This is a windfall however for large oil consuming nations like China which imports 72% of its oil and is the world largest oil importer. India, Japan and South Korea have to be smiling. This will give them a boost that the U.S. will not share. While U.S. consumers love cheap gas, they are not driving because they are staying home in social separation. The bigger picture however is that the U.S. had become a marginal oil exporter as shale oil production exceeded U.S. needs making the U.S. independent of foreign oil. Lower prices benefit U.S. consumers but put U.S. crude producers on the ropes. The net impact to the U.S. economy is unbalanced to the negative.
If you didn’t notice, the ethanol market has collapsed taking the corn market with it. Announcements were coming that some ethanol plants were planning to shut down causing some fearful selling by corn producers breaking the basis. Russia, the Saudis and Ted Cruz would love to take out the U.S. ethanol industry. Ethanol typically sells discount to unleaded gas which consumers benefit from at the pump. When unleaded gas prices collapsed, ethanol was suddenly 45 cents gallon above unleaded. The ethanol market lost half that premium in two days and there is no reason that it will not lose the rest. Gas consumption will slump sharply as consumer park their vehicles as will ethanol consumption that is tied to that. Falling feed consumption, ethanol plant closings and a new high in the U.S. dollar are ganging up on the corn market with crushingly bearish fundamentals.
Trump is close with both Putin who helped elect him, and the Saudis with which they cemented a relationship with a sword dance with Trump covering for the Prince’s murder of Jamal Khashoggi.
He then sent patriot missiles to defend Saudi oil fields from Iran. He has added US troops to the mid-east, while promising to do the opposite, in order to back up the Saudis. So, we are protecting Saudi oil whose production they are boosting to break the US shale oil and biofuel industries. That is exactly where Trump has put us. That is the opposite of America First. It is quite the feat of foreign policy which is what happens when you purposely do not do the right thing for the wrong reasons.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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